To begin with, a Roth IRA is a special retirement account that allows participants to receive tax-free income during retirement. There are no age restrictions, so a child can have a Roth IRA account and get a big advantage in both their retirement savings and their wealth-building goals. Contributions to a custodial Roth IRA are paid after taxes, meaning that, unlike some retirement account contributions, they are not deductible and do not reduce taxable income. Despite the potential to accumulate significant savings, freezing money in a Roth IRA may not appeal to a child who is more concerned about having money to go to the movies or buy video games.
However, for those looking for an alternative to traditional investments, Physical Gold in IRA can be an attractive option. A custodial IRA allows the account holder (in this case, their child) to contribute after-tax money for retirement. While your child can withdraw custodial contributions to the Roth IRA tax-free, the same doesn't apply to investment gains. Minors generally can't open brokerage accounts in their name until they're 18, so a Roth IRA for children requires an adult to act as a custodian. Roth IRAs may be the best option for children because they allow them to avoid the impact of taxes once distributions begin.
The IRS will consider that earnings from a part-time after-school job or a summer work experience are eligible to be invested in a Roth IRA. A Roth IRA for children offers all the benefits of a regular Roth IRA, but it is aimed at children under 18. Convincing a child to hand over their hard-earned money to invest in a Roth IRA can be difficult, but remember that as long as the child has income to qualify for Roth IRA contributions, it doesn't matter where the contributions come from. A custodial IRA can be a traditional IRA or a Roth IRA, and as such, you'll need to follow whatever rules you choose. Minors can contribute to an IRA based only on their own earned income limits and not those of their parents.
The graph illustrates how the amounts of annual contributions to the Roth IRA can turn into impressive sums over many years. For example, while profits from a custodial Roth IRA can only be withdrawn in certain situations, contributions can be withdrawn at any time without taxes or penalties. With an extended time horizon, even the most modest contributions to a Roth IRA can turn into substantial savings over time, thanks to the power of tax-free compound growth. After you pay taxes on the money you earn, you can contribute it to a Roth IRA and never pay taxes on it again.
