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A Roth IRA is a powerful tool for building long-term wealth, and there’s no better time to start than when you’re young. If your 18-year-old has earned income, opening a Roth IRA can be a wise decision.
Here’s why:
- Tax-free growth: Unlike a traditional IRA, contributions to a Roth IRA are made with after-tax dollars. However, the earnings on those contributions grow tax-free and are also tax-free when withdrawn in retirement. This can significantly boost your child’s retirement savings over time.
- Early contributions, big impact: The power of compounding interest is magnified when you start investing early. Even small contributions made in your child’s early years can grow into a substantial nest egg by the time they retire.
- Flexibility: Roth IRAs offer flexibility in how you use the funds. While they are primarily intended for retirement, you can withdraw contributions without penalty at any time. This can be helpful for unexpected expenses or even a down payment on a first home.
- Learning about investing: Opening a Roth IRA can be a valuable learning experience for your child. It teaches them about investing, financial planning, and the importance of saving for the future.
However, before opening a Roth IRA for your 18-year-old, there are a few things to consider:
- Earned income requirement: To contribute to a Roth IRA, your child must have earned income. This means income they earned from working, not from gifts or allowances.
- Contribution limits: There are annual contribution limits for Roth IRAs. In 2023, the limit is $6,500.
- Investment choices: Roth IRAs offer a wide range of investment options, so it’s important to choose investments that are appropriate for your child’s age, risk tolerance, and financial goals.
If your child is interested in opening a Roth IRA, here are some steps to get started:
- Choose a custodian: You’ll need to open the Roth IRA through a custodian, such as a bank, brokerage firm, or robo-advisor.
- Fund the account: Once the account is open, you can start making contributions. You can contribute up to the annual limit or your child’s earned income, whichever is less.
- Choose investments: Work with your child to choose investments that align with their financial goals and risk tolerance.
Opening a Roth IRA for your 18-year-old can be a great way to help them build a secure financial future. By starting early and taking advantage of the tax benefits of a Roth IRA, your child can put themselves on the path to a comfortable retirement.
Here are some additional resources that you may find helpful:
- SmartAsset’s Roth IRA Guide: https://smartasset.com/retirement/roth-ira
- Investopedia’s Roth IRA Guide: https://www.investopedia.com/terms/r/rothira.asp
- The IRS’s Roth IRA website: https://www.irs.gov/retirement-plans/roth-iras
Remember, it’s never too early to start planning for retirement. By helping your 18-year-old open a Roth IRA, you can give them a valuable head start on their financial journey.
Here are some additional benefits of opening a Roth IRA for your 18-year-old:
- Teaches financial responsibility: Opening a Roth IRA can teach your child valuable lessons about financial responsibility, such as budgeting, saving, and investing.
- Prepares them for the future: By starting early, your child will have more time to grow their retirement savings and reach their financial goals.
- Provides peace of mind: Knowing that your child has a retirement plan in place can give you peace of mind and reduce financial stress in the future.
If you’re still unsure whether opening a Roth IRA is the right decision for your 18-year-old, consider talking to a financial advisor. They can help you assess your child’s financial situation and make recommendations that are tailored to their needs.
The tax advantages are prime for kids
The way the Roth IRA operates is as follows: Qualified distributions made in retirement are tax-free because there is no tax benefit for contributing to the account. All of that growth we’ve been talking about is earned entirely tax-free provided your child complies with distribution guidelines.
When your time horizon is long and your current tax rate is low—both of which are the case for children—the Roth tax treatment is extremely beneficial. In fact, most children’s earnings are so low that they pay little to no income taxes, which means they also avoid paying contributions taxes.
Investing can trump saving over the long term
The more conventional option for kids, a plain savings account, is flexible and doesn’t require earned income, so that kind of growth might not occur there. Birthday money is welcome in a savings account, unlike in a Roth IRA.
However, your children can choose their own investments with a Roth IRA for kids, which over time can result in the kind of growth mentioned above. Of course, there are trade-offs. The biggest one is that your children may lose the money they invest in a Roth IRA, but historical evidence suggests that this is unlikely to occur if they maintain a diversified portfolio over an extended period of time.
Watch This Before You Open A Roth IRA For Your Kids
FAQ
Is it smart to open a Roth IRA at 18?
What happens to a minor Roth IRA when they turn 18?
Is it a good idea to open a Roth IRA for a child?
At what age does a Roth IRA not make sense?
Can a 18 year old open a Roth IRA?
You can open a custodial Roth IRA for your child as long as he or she is under age 18 and has employment income, which can come from some form of self-employment. Contributions are limited to the child’s earned income for the year, up to the $5,500 annual limit. Can an 18 year old open an IRA?
Should you open a Roth IRA for kids?
The earlier your kids get started saving, the greater opportunity to build a sizable nest egg. A custodial Roth IRA for Kids can be opened and receive contributions for a minor with earned income for the year. Roth IRAs provide the opportunity for tax-free growth.
Can you open a Roth IRA on your own?
As long as the account holder has earned income for the year, they can contribute to a Roth IRA. While they may be able to earn income, they can’t sign up for a Roth IRA on their own until age 18. Before then, you can open what is known as a custodial Roth IRA.
Can a minor open a Roth IRA?
Yes, but they may need the help of a parent or guardian. There are no age limits to open a Roth individual retirement account (Roth IRA). As long as you earn income, you can open an account. As a minor, parents will have to open a custodial account in the child’s name and control the investments until they come of age.