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. After you pay taxes on the money you earn, you can contribute it to a Roth IRA and never pay taxes on it again. With traditional IRAs and traditional custodial IRAs, money is deposited before taxes and then taxed at the time of distribution.
As long as your child earns money and pays taxes on them, they can contribute to a custodial Roth IRA. However, when your child reaches the legal age of majority in your state (usually 18 or 2 years old), your Roth IRA with custody will need to be converted into a regular Roth IRA in your name. In addition, the retirement rules of a Roth IRA not only make it a particularly useful tool for saving for your child's retirement, but also for college expenses and other major life events. A custodial Roth IRA is a tax-advantaged retirement account that a parent or other adult opens on behalf of a minor.
Like other custodial investment accounts, a custodial Roth IRA has an adult acting as a custodian and is usually the parent or legal guardian of the child. 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. Once your son or daughter reaches the age of majority, as defined by their state, the Roth IRA is transferred only in their name. A custodial IRA allows the account holder (in this case, their child) to contribute after-tax money for retirement.
The bottom line is that Roth IRAs are ideal for children, because children have decades for their contributions to grow tax-free. 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. Establishing a Roth IRA for children allows the children in your life to start taking advantage of the opportunity to grow up tax-free at an early age. In addition, at the time of retirement, the account owner must have had a Roth IRA open for at least 5 years, counting from the start of the first calendar year in which a Roth IRA was opened.
