The Best Retirement Account for Kids
Kids? Retirement? Yes, and it works very well for my tip of the day. If your child is working (mowing yards, part-time job, babysitting, 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 $6,000 for 2021. 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 in 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. let us 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.