Let’s talk about how a Kid friendly Roth IRA can set your child up to become a millionaire.

Saving money is an important part of life and this is especially true for kids. Many parents feel that the financial climate is only going to get worse as time passes. Prices are going to rise and unless a child is prepared they are going to financially struggle in life. Parents that start to save money for their children while they are young will help them to prepare for the future. One of the best ways that they can do this is by setting up a kid friendly Roth IRA for their child.

What is an IRA?

An IRA is known as an Individual Retirement Account and it is used as a form of retirement income. This type of account is set up at a financial institution This type of account is tax free and is tax deferred. There are three basic types of IRAs and they consist of traditional, Roth and Rollover. Only the Roth type will be discussed.

A Roth IRA allows a person to make contributions with money that has already been taxed. This money can increase at a tax-free rate and not be taxed once it is withdrawn during retirement. Roth IRA account holders must meet certain guidelines to ensure that this type of account can be used for retirement purposes.

What is a Roth IRA for kids?

Parents can set up a Roth IRA for their children. This type of plan is designed to save up money for a young child so that they will have income for retirement. Parents are not the only people that can use this type of account. Any adult can open up this type of account for a child. Grandparents, Uncles, Aunts and/or Family Friends can open a Roth IRA for a child. A child must earn an income in order for the Roth IRA to be valid.

What are the rules for this type of account?

People that want to open up a Kid’s IRA will have to meet specific guidelines. The Roth IRA rules and guidelines are listed as follows:

*Anyone who has a job with taxable income can contribute to this type of account. This includes minors. A minor child 17 and under can contribute if they make enough taxable income to do so. In most cases minors who are not able to legally work a job probably will not be able to contribute to this type of account. Qualifying self-employment counts as well. Young people that babysit or cut lawns can also contribute to this type of account as well.

*The only type of income that can be placed into this type of account has to come from a person’s earned income from a job.

*The adult on the account will manage it until the child is old enough to take over the account for themselves. This usually happens between the ages of 18 and 21.

*Roth IRA contributions cannot exceed a minor’s earnings. This means if a child only makes $500 then the contribution limit can only be $500.

*There is a maximum contribution limit of $5500 per child. This cannot be exceeded within a given year.

*Account holders can withdraw money from their account without being taxed. Only adult account custodians can do this. Minors can only do this once they reach a certain age.

*A person does not need to put down a minimum amount open a Roth IRA for kids.

*There are no fees for this type of account.

These are the basic guidelines that must be followed when a person sets up a Roth IRA.

What are the benefits?

People who set up a kiddie Roth IRA for kids can establish wealth for their kids once they mature. This is a wise thing to do for a child’s future and a great way to leave an inheritance. Another benefit for the Roth IRA.  Over the course of many years and wise investing in a Roth Ira your child could have a substantial income saved up for them in the future. Roth Ira accounts coupled with compound interest can create legitimate wealth.

How do they work?

Here is basic scenario to help you understand how this type of account works. If a 7 year old child saves up $2000 a month a year at 6% interest until they are aged 65 they could earn over a million dollars. This is a hypothetical situation but it is possible.  A Roth IRA calculator can be used online to help account holders figure out what their particular retirement is going to be once they reach that age.

Important Points to Remember about IRAs for Kids

Remember that a child and adult must have a job to open one of these accounts. They should use their W-2’s as proof that they are income earners. The W-2’s will also describe a person’s work, the time period that they work, their employer and the total amount of money that they paid during that time period.

Parents contributions to Roth IRA account for kids will be closely scrutinized. People who own a business will be able to employ their children but they must give them meaningful work with a real wage. The IRS can help a person to figure out what type of work could be counted as meaningful.

Children that make over $6,100 should file a return.

People can withdraw money from their Roth plan and not be taxed or penalized. However, they will have to wait until they are 59 1/2-years-old to do so. Otherwise they will receive a 10% penalty tax.

Qualified Expenses

A portion of the funds saved in a child’s Roth IRA account can be taken out for qualified expenses.

Qualified Expenses such as a down payment on a home or a college education are the type of things that the money will be qualified for use. This type of account can also serve as a backup plan. Other uses with this money will be taxed. IRA accounts should be left alone unless they are being used for a valid reason.

RMD - Required Minimum Distribution

Keep in mind that Roth IRAs (even kiddie IRAs) are subject to a (RMD)required minimum distribution rule. This rule simply states that all Roth IRA account holders must withdraw money from their accounts at some point. For Roth IRA account holders, they are required to use this rule once they reach the age of 70 1/2-years-old.

Roth IRA for kids is a great way to save and invest money for retirement and as a fund important life decisions or emergency situations. Children can use Roth IRA for kids to learn about saving and investing their money. This plan also gives parents a great way to provide for their child’s future. Ultimately, a Roth IRA is a great plan that helps a child to secure their financial future.