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How to guarantee your kid becomes a millionaire?♬ original sound – thebusinesskid
Okay, let’s talk about setting your kids up for success. This is going to open your minds up to creating generational wealth that will pass through from generation to generation.
When you open an Roth IRA for kids, they now have a savings vehicle that are perfect for kids as their savings grow tax-free and they usually have decades to grow them.
Roth IRA Benefits
- As long as kids have earned income, kids of any age can contribute to a Roth IRA. That means that if YouTube is paying your baby to make a cute video, that’s earned income. If TikTok is paying your baby, that’s earned income. There will be way more opportunity for your kids than what you had available to you.
- Then, the Roth IRA is more flexible because contributions can be withdrawn at anytime, tax-free without penalty. That means your kid can withdraw the amount that you put in without penalty, tax-free.
- Then, as the Roth IRA grows, when your child hits 59 1/2, they can withdraw all of it, tax-free.
To get started, you would open up a custodial Roth IRA for your child.
Should I Open Up a Roth IRA?
Keep in mind, your child must have earned income (babysitting, lawn mowing, TikToks, YouTube, Social Media). Then, you can match your child’s contribution as long as they have earned THAT amount.
Then, keep in mind, the limit that you can contribute to the Roth IRA is $6,000 per year in 2020 or the total of the earned income, whatever is less. If your child earns $1,000 for the year, then they can contribute up to a $1,000 to a Roth IRA.
Get started. Start with a small amount, whatever you can afford. You may also think about opening one for you and your other half. Just start investing small amounts and set it up on auto-pilot savings. You’ll see how quickly it starts to grow, and now, when brokers use robots to invest, it takes the guesswork out of what to invest in.
Compound Interest Calculator
How much will your kid have when they retire at 50? Let’s do the math using our Roth IRA Compound Interest Calculator. Keep in mind that when your child gets a real career with real money, they will be contributing much more, but this will give you an idea of what’s possible.
Frequently Asked Questions about Roth IRA’s for Kids
There are no age restrictions. Kids of any age can contribute to a Roth IRA as long as they earn income. A custodial parent will need to open the custodial Roth IRA for your child. Kids will be able to withdraw the amount contributed to the Roth IRA at anytime (perfect for college) without paying taxes. Then, as they start working they can contribute to the Roth IRA and start withdrawing at 59 1/2 without paying taxes.
The limits for 2020 is $6,000. However, your child must earn that amount in order to contribute that amount. Also, you can match any contribution that your child contributes to the Roth IRA. So if your kid makes $3,000, they can contribute up to $3,000. Plus, you can match up to $3,000.
Roth IRA accounts have historically earned between 7% and 10% annual returns.
Vanguard, Fidelity, and Schwab all offer custodial Roth IRAs.