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Andy Wang
Andy Wang
π LinkedIn Top Voice | Financial Advisor to Families & Business Owners | Advisor to 401(k) Plans | Forbes Top 10 Personal Finance Podcast | Featured: Barron's, Reuters, Investopedia
Published Feb 28, 2024
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When saving for retirement, finance gurus preach that starting early is the best strategy. This is why you should consider helping your child set up a Roth IRA as soon as they start earning income.
A Custodial Roth IRA is a specialized account designed for minors, allowing parents or guardians to open and manage the account on behalf of the child until they reach the age of majority. Contributions to this account are made with after-tax dollars, meaning withdrawals, including earnings, can be tax-free if certain conditions are met.
Keep in mind that your child's IRA contribution can only be done if your child has earned or taxable income. The income can be from any source, such as babysitting or mowing the lawn (ideally not yours). Unfortunately, allowances aren't a legitimate source of income; but you may be able to pay your child for work done around the house, provided it is legitimate work, and the pay is at the going market rate.
If you are worried about taxes, the good news is that babysitting money is exempt from paying self-employment tax as teenage babysitters are normally considered employees. If a child under 18 is working part-time as a household worker (babysitting, gardening, housecleaning, home repair), he or she is also exempt from the self-employment tax.
The Pros and Cons of Roth IRAs for Kids
Pros:
Cons:
Conclusion
While tax laws could change over time, we believe in the adage of starting to invest as early as possible. If you help fund your child's Roth IRA, the tax advantage can be massive, and you just might help pave their way to a million dollar retirement.
If your child earned money from babysitting money or a summer job, what's holding you back from opening a Roth IRA?
Chris Wang , Managing Partner Runnymede Capital Management, Inc.
Inspired Money
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Keenfunnel
6mo
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Setting up a Roth IRA for your kids is a savvy way to invest in their future from a young age!
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Woodley B. Preucil, CFA
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Andy Wang Very insightful. Thank you for sharing
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