Why a Roth IRA is recommended for Your Kids

Why a Roth IRA is recommended for Your Kids

Many benefits come with having a Roth IRA for your kids. In addition to the benefits of early investment, here are some reason a Roth IRA is suitable for your kids 

You can withdraw your Savings Anytime

It is a general knowledge that you incur a penalty when you withdraw early from your retirement account. For instance, 10% penalties when you remove before you reach the age 59½. This principle might not apply to kids.

Kid's Roth IRA is different in that they can withdraw the money any time for whatever they need it to be in college tuition or car 

This flexibility is checkmated by a strict rule for the earnings from an IRA account. Owners can tax the distribution of investment earning, although there is a 10% penalty on early distribution.

With these two rules, Roth IRA is an excellent option for a parent who would prefer their kids to save up some cash for the future and kids that want unrestricted access to the money.

Increased Profit Overtime

There is the concept of compound interest in mathematics. In simple terms, it means the more you leave your money, the more the earnings. Adults typically have between 25 to 40 years after they start saving for retirement. Kids that start earlier have the benefit of increased time. Should they be patient to leave their money till retirement, they will have between 50 to 60 years of tax-free investment growth.

If waiting for 60 years seems like asking for too much, consider this. A one-time investment of $6,000 in a Roth IRA, if left for 60 years, will grow to $200,000 without any additional investment. (provided there is a monthly investment of 6% with monthly compounding)

Investment is Better than Saving

The kind of growth you get with a Roth IRA will not happen with a savings account. Many kids, however, chose traditional saving because it is flexible and straightforward.

Roth IRA stands out in that you can choose the investment type you want for your kids. If you chose the type described in the previous point, you could have such growth. The savings account has the disadvantage of paying a flat interest rate. This investment rate currently revolves around 0.09%, which is way discouraging from the 6% annual return you get from a onetime IRA investment.

Sadly, even if the interest rate be increased to 1% per month, a deposit of $6000 will not double after 60 years!

Kids get some Tax Advantages

There is a unique way that the Roth IRA works. Since there is no tax break for investing or depositing money into the account, it is not subjected to tax. Your kids can earn all their money which will not be subjected to tax should they follow the rules for tax distribution.

If your present tax rate is low, and you still have a long time, Roth's tax nature is pretty favorable, which applies to kids as well. Since the earnings of most kids are low or nothing, they pay little or no income tax. This means they get to avoid taxes on their contributions as well.

You can use the money for something other than retirement

It is essential to point out that a Roth IRA is a type of retirement account. The idea is to allow the funds in the account accumulate to a significant value over some time. It is, however, essential to note that a Roth IRA is not strictly a retirement account.

You can withdraw money anytime for whatever reason. In the same way, there are methods with which your kids can access their investment earning even before age 59 1/2.

For instance, your kid can withdraw as much as $10,000 of the earnings to buy a house without tax or penalty. This is, however, after the Roth IRA has been funded for five years. 

In addition to buying a house, the earnings can be diverted to qualified college expenses like college tuition fees, for instance. While this might be taxed, it does not come with a penalty.

As explained above, your kids are way better off with a Roth investment. It is a good way to help secure their future. 

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