Find Out If It Is Possible To Open An IRA For Your Child
By Melissa Phipps
Updated June 27, 2016
Question: Can I Open an IRA for My Kid?
I keep hearing that the earlier you start investing for retirement, the faster your money can grow. So can I put my son or daughter on the path to early retirement by giving them an IRA or Roth IRA?
The answer is yes, but only if your child is earning income. Anyone earning income younger than 70 1/2 can make contributions to a qualified retirement account.
But since you have to get them to contribute some of their own earnings, the toughest part will be convincing them to stash away today's money for their golden years.
If you can convince your child to make contributions to an IRA or, even better, a Roth IRA, you can even match those contributions up to the contribution maximum for the year. The maximum limit for both accounts in $5,500 in 2016.
Why Is a Roth IRA Better?
For kids in particular, a Roth is a great idea because you pay today's taxes on future investment growth. Roth IRA contributions are made after-tax, and you pay no taxes on distributions from a Roth at retirement. Your child will not likely ever been in a lower tax rate than she is today, so it's a great time to make the most of the Roth's benefits. Plus, contributions to a Roth (but not earnings on those contributions) can be withdrawn penalty-free before retirement. So your child has access to some of her savings.
(Understand the Roth IRA five-year rule.)
Why Open an IRA for Your Child?
IRAs for kids is not an extremely popular concept, but it can be a great idea. Contributions can add up quickly. Earnings potential rises exponentially the earlier you start as an investor in a tax-deferred account. (See how compounding makes a huge difference in the article No, You Are Not Too Young for an IRA.)
If you want to teach your child about the financial markets, getting them to invest their own cash is a good way to start. For example, you can show them how your money can buy you a few shares of a single stock or give you access to the entire market with a mutual fund or exchange traded fund. Companies like Fidelity, Vanguard and T. Rowe Price can help you get started with accounts that have low annual fees as well as low minimums to start investing. At T. Rowe Price you can start an IRA with just $1,000, compared to $2,500 at Fidelity and $3,000 at Vanguard. At Fidelity, you can get into a Roth IRA or IRA if you sign on to make regular contributions of $200 a month. Other
Plus, with an early IRA or Roth IRA you are setting your kids up with a financial life that they can build upon and learn from a few years earlier than their peers. Early experience like that can be invaluable in helping your child make wise financial decisions.
IRAs and College
All IRA and Roth IRA contributions can be withdrawn tax and penalty-free to pay for education. However, there is a downside to using a retirement account to save for college. An IRA or Roth IRA in your child's name may affect his or her chances for financial aid.
Children's assets in a retirement account are considered when determining need, whereas those same assets wouldn't be considered if held in one of the parents' accounts. But parents should be using their IRAs or Roth IRAs to save for retirement, not for college.