YES, There are Roth IRAs for Kids!

There is a great tool that you need to know about: a Roth IRA for kids. All contributions, just like in an adult Roth IRA, are going to be after tax. That money never gets taxed again. This kind of account teaches them valuable lessons about saving and investing at a young age. If they never add another dollar to that account, that $400,000 could turn into $6 million.

Welcome to another edition of We're Talking Money. I'm Phil Clark, and today we're diving into how parents and guardians can help their kids get a head start on retirement savings, even if retirement savings is not on a young person's mind.

Now, young people today, they have a lot going on, lots of distractions, and they're probably not thinking about retirement planning or savings. But there is a great tool that you need to know about. It is a Roth IRA for minors, or as we like to call it, a Roth IRA for kids.

Now, this type of Roth IRA is specially designed for children under age 18. Now, the parent or the guardian owns the account. You establish it, and you control getting the money into the account and making the investments. But the contribution actually comes from the child's earnings, and that can be from anything that falls under the entrepreneurial spirit for kids, something like mowing lawns or babysitting. Could be working at the local hardware store. Whatever the case is, if they have earned income, they can put up to $6,500 per year or 100% of their income, whichever is less, into this Roth IRA for kids.

Now, the beauty of the Roth IRA is flexibility and, of course, future benefits. All contributions, just like in an adult Roth IRA, are going to be after tax. But once everything gets put into the Roth IRA, that money never gets taxed again. We're talking about tax-free growth and tax-free distributions for the rest of their life once they hit 592 years old. Plus, this kind of account teaches them valuable lessons about saving and investing at a young age.

The power of the Roth IRA for kids can be seen better when you look at the numbers. Now, in this example, we're assuming that your child works and earns $6,500 a year, and they contribute that to their Roth IRA every year for 20 years. Now, that means they put a total of about $130,000 into the Roth. At the end of that 20 years, assuming a 10% average rate of return, they end up with about $400,000 in their account. If they never add another dollar to that account, over the course of the next 30 years, that $400,000 could turn into $6 million.

Talk about a head start for your kids. That is a tremendous amount of money and would make a difference in anyone's life in a really positive way.

Now, getting kids on board with this idea of saving in a Roth IRA, particularly at a young age, that can be difficult. They might have other things on their mind, something that would be much different than, say, saving for their retirement. But there are some useful ways that maybe you would consider to help get your young one started in the right direction.

For example, just like an employer matches a 401k when an employee defers some of their income, you could do the same for your child. If they're willing to put some money into the Roth IRA, perhaps you could induce them by offering a match. That gives them a little bit to spend, a little bit to save, and you match it. That means they have even more working for them at an earlier age.

Just because they put the money into the Roth IRA doesn't mean that all flexibility is lost. In fact, the Roth IRA allows your child to take up to 100% of their contributions out at any time. That means they don't have to wait until 592 years old. So if something came up and they needed the money, they still have access.

Starting a Roth IRA for your child or grandchild not only sets them on a path for financial security, but it introduces them to the principles of investing and saving for their future. Now, your kids might not thank you immediately, but the tax-free wealth that you're helping them accumulate will likely get a lot of thank-yous in the years to come.

I hope this episode has inspired you to consider giving your child a head start by establishing a Roth IRA for kids. They grow up so fast, and the cost of life gets more expensive every year. Not to mention, when you start a Roth IRA for your child, it's a great way to teach them at an early age about saving and investing for their future.

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