Why Might a Child IRA Be Right for You?


Have you ever heard of a Child IRA? As long as your children are earning income, they can begin to contribute to an IRA and build a solid financial foundation.

How Do You Begin?

The first step is verifying that your child is earning income. This could be from babysitting, mowing lawns, a summer job or other occupations. Anything that is an “earned income,” rather than a gift or contribution, is eligible to go into a Child IRA.

We recommend opening a Roth IRA for your child, because that’s where the most powerful compounding happens. The account grows tax free. Those with very little income are not looking for an income tax deduction anyway, so a Roth IRA is ideal.

What Should You Watch Out For?

In many cases, the parents can “match” the child’s wages in the form of a Roth IRA contribution. However, this contribution does count toward the maximum annual exclusion of $15,000 per year. If you are making other contributions to a child’s trust (including life insurance trusts), this would reduce the amount you can give to those other wealth transfer vehicles.

Why Should You Open a Child IRA?

1) Instill Financial Values

Earning a first paycheck is a source of excitement and pride. It’s also a great time to start talking about your financial values. With an IRA, you can start to talk about the purposes of income, saving and spending, and the importance of having a long-term plan.

2) Incentivize

You can encourage your children to get summer jobs and work hard to earn an income by incentivizing them with the promise to “match” their wages up to $6,000 in the form of an IRA contribution.

3) Practice Good Financial Habits

Just like any other healthy habit, financial habits are instilled with practice. If children practice setting money aside, rather than spending it all — and see the benefit of contributions and compounding interest — they will be more likely to keep up that habit over a lifetime.

4) Grow a Future Foundation

In addition to practicing a good habit, children will have built up a pretty nice-sized account that they’ll be able to use for major milestones, such as a down payment on a house.

5) Provide You Peace of Mind

When you take this step, you can be confident that you are not only setting a good example, but are also giving your children the practice and foundation they need for future financial success.

We have many clients who have set up Roth IRAs for their children and contribute with matching funds. They can attest to the profound impact this has made in their children’s perspective and financial stability. If you are interested in exploring this option for your children, speak with your advisor or contact us today.

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