The Best Retirement Account for Kids
Kids? Retirement? Yes, and it works in very well for my tip of the day. If your child is working (mowing yards, part-time job, baby sitting, etc.), he or she has the opportunity to fund a Roth IRA. There are no age restrictions. However, there is a maximum that they can fund a Roth of $5,500 for 2018 or $6,000 for 2019. The trick is that they have to earn as much as they contribute. If they only earn $3,000, then they can contribute up to that amount. They just can't exceed the contribution limits.
Why a Roth IRA?
Your Kids aren't Concerned about Taxes until Much Later
Most people invest into a regular IRA so that they can get the tax deduction for the money that they contribute. With the Roth, you don't get that tax deduction up-front. You get the tax benefit on the back end. For example. lets say that a child starts a Roth in their teenage years and contributes to it for 50 years and accumulates $2,000,000 in the account. They can take that entire amount out TAX FREE. So, think about it. Would you rather get the small annual tax deductions along the way or tax free income at retirement? Now consider that when you have 40 to 50 years to contribute and accumulate wealth in a Roth.
They have a Built in Emergency Fund
Money that you contribute to a Roth can be pulled out penalty free in the event of an emergency or need. Of course, you don't want to treat a retirement account as a piggy bank. However, it is nice to know it is there if a crisis occurred. It also goes without saying a Roth is not a substitute for an emergency fund. It is just a nice added benefit that you won't find with a regular IRA.
BIGGEST BENEFIT - You teach them a lifelong Habit
Teaching our kids to save is a huge advantage that will pay big dividends later on in life. As I have always said, if we don't teach our kids about money, the world will do it for us.
To get started, you can open up a Roth with a minimum amount. This will open the door to questions and a real life tool to teach them about how money works.