Saving for your children’s future is always on a parent’s mind. You want to make sure that they have a sturdy financial future. Starting early is the best way to go when it comes to creating financial security. Why not open a ROTH IRA for your child? Opening a Roth IRA for minors hold two great opportunities for you and your child. First, of course, it is a great way to save money that your child will have when they become an adult. Secondly, it is a great tool to teach your child how to earn and save money at the same time. Teaching financial responsibility is a good way to help your child learn how to manage money. The tool for managing money responsibly will carry over into their adulthood.
Rules and Regulations for a Minor’s Roth IRA
There are rules to opening a Roth IRA for a minor that must be followed to avoid penalties and possible closing of the account. The main basic rule to remember is that this account may be monitored by the parent or adult; but it is truly the minor’s account. In addition, monies deposited into the Roth IRA must be earned by the minor. The minor’s earnings can come from babysitting, yard work, etc. Documentation is a must when utilizing a Roth IRA for a minor, you and the child will be responsible for documenting all deposits into the account. Although the account should reflect the child’s working income, the parent/adult can make gift contributions within limitations of IRS guidelines.
How to Open an Account
The best option for seeking advice on opening an account is through a bank or a brokerage firm. Both options will give you the education that is needed to understand how the Roth IRA for your child works. Do your research and shop around, try to look for options such as: $0 opening fees or minimum balance. For trading purposes there will be a small fee, to avoid excessive charges try to limit your trades to combat this issue. Also remember that the deposits are from your child’s earnings, which means make sure that the amounts deposited are within the realms of their wages. Before building the trading portfolio, seek assistance with a professional that can guide you through the struggles of investing.
Benefits and Use of Funds
The biggest benefit besides saving and investing in your child’s future, is the withdrawal of funds without the penalty of taxation. Unfortunately, to receive free taxation, you must keep the funds in the Roth IRA for a minimum of five years. This does not mean you cannot withdraw funds at any time, it simply means that you will be taxed if you withdraw before the five-year limitation.
Once your child is an adult, you can speak with your broker to have the account officially dedicated to him/her. Once this is done the sole ownership is moved over to your adult son/daughter. The funds can be used for any reason they deem necessary. Typically, individuals keep the funds in the account until they’re age 59 1/2 for retirement, which no taxation penalties would be involved. In some cases, the funds are used for college expenses, unexpected emergencies, or for purchasing a home.