Roth IRAs for Children

May 2015

rick -2

With the unofficial start of summer (Memorial Day) just a week away, it’s that time of year where many high school kids will be looking for a job and for many of them it will be their first job.  There are many benefits for a kid getting a job and working; including learning the discipline it takes to have a job and at the same time the pride it creates when someone earns their own money.  Therefore, I encourage all parents to help their kids get that summer job as the lessons and skills that they learn will be invaluable to their future.  That being said, the fact that your child will work does create another unique opportunity.


When a young person works and earns income from their labor, they automatically become eligible to open up a Roth IRA.  I recognize that probably the last thing your child wants to think about is retirement; however, the benefits of starting to save for retirement at a young age are tremendous.  Just think about how much money would grow if left in an account growing tax free for 50 and 60 years.  The numbers are dramatic.  Therefore, by working with your child and establishing a Roth IRA as soon as they begin to work, even if it is only part time in the summer, it will pay tremendous dividends in the future.


There is another benefit that you would get from working with your child to establish a Roth and that is an invaluable financial lesson.  By encouraging your child to put money away for their retirement, you’re teaching them the importance of saving and investing.  After all, let’s face facts; they’re not taught the importance of investing at school and therefore, it falls on you.  The earlier you can begin to teach your children good financial habits, the better they will be.


To encourage your kids to put some of their money away for retirement, you can also incentivize them.  For example, you can offer some sort of match program.  As long as the total contribution to the Roth IRA is equal or less to what their earned income is, then there are no problems.  For example, if your child earned $2,500 in the summer, they are entitled to invest $2,500 in a Roth IRA.  Whether it is actually their money or your matching money is not relevant.  The key is the total dollar amount being invested.


To open up a Roth IRA for a child is a little more difficult than opening up a Roth IRA for you.  Because your child is probably under the age of 18 you have to open what is known as a custodial IRA.  Many custodians offer these types of Roth IRAs, but some do not.  Companies like TD Ameritrade, Vanguard, and Schwab all offer custodial IRAs at a low cost.


My recommendation is that you get your child involved in the process at the very beginning.  Work with them in selecting the right custodian and have them get involved with selecting the right investment.  After all, one of the great benefits of getting a younger person involved in investing is that you can teach them good investing habits at a young age.  My belief if that if they’re involved in the process they will take a much greater interest.


I cannot stress enough that if you want to give your child or grandchild a head start in their future, helping them open a Roth IRA is a great start.  The earlier they can learn the appreciation and understanding of money the better it will be for them.  It will be an invaluable lesson they will carry with them for the rest of their lives.


Good luck!