What You and Your Kids Must Understand About the Roth IRA

by Neal Frankle, CFP ®


If you have children, do yourself and them a favor; teach them about the Roth IRA. Don’t do this because they are your Roth IRA beneficiary. Encourage them to own their own Roth accounts.

If you do, they’ll get a huge head start when it comes to understanding how investments work. They will also start putting aside a nice chunk of change for their own future. As a result, you won’t have to worry about your son moving back in with you when he turns 60 (or before). There is a lot at stake when it comes to your kids understanding money and the Roth IRA is the best way to teach them the subject. The good news is they don’t need to become an expert in IRA restrictions and rules in order to benefit big time.

Why is the Roth so important for young people?

Before I answer that, let me briefly remind you that a Roth IRA is a retirement account. Young people don’t spend much time thinking about retirement. I get that. Don’t try to tell them that they should because it’s an argument you can’t win. Just tell them that the Roth is a great way to learn about investing. If they like spending money, they’ll probably enjoy learning how to make money too. With a Roth, once you deposit money into the account, it grows tax-free. And if you meet certain Roth IRA requirements, you can withdraw the money tax-free as well. You can see that this is very well suited for a young person with a long time ahead to invest.

How Much Can Your Child Invest?

Your child can invest up to $5000 or 100% of her earned income – whichever is less. So if she wants to sock away some money, she has to go out and get a weekend job and earn it first. That’s going to get her thinking about work and money in the right way. And that kind of thinking is worth a great deal to you.

What can your children invest in?

Just about anything they like. They can buy stocks, bonds and/or mutual funds. And if they don’t know what these things are, the Roth IRA is a great way to introduce them to these important tools.

Why Is Tax Deferral So Awesome?

Tax deferral is awesome for the kids because the money grows without Uncle Sam sinking his teeth into the earnings. Investments made outside of tax deferred accounts grow more slowly because the Government takes a big chunk of the earnings for itself. With the Roth all the earnings belong to your youngster – 100%. They can tap into the money at age 59 ½ without a penalty or tax as long as they have invested it for at least 5 years. If the kids access the money before this time, they may incur a 10% IRS penalty on top of income taxes. This is also great for you because your kids will be motivated to keep that money growing rather than spend it. Nice. I’m not going to discuss how powerful compounding tax-free growth is in this post. While it’s fantastic, there are very few kids who will be motivated by benefits they’ll only get to take advantage of 20 or 30 years down the road. The Roth IRA helps you and your kids today. That’s because it teaches them about money. It teaches them great habits like saving, tracking spending, work and investing. Think about how much easier your life would be today had you learned those lessons as a kid. Share your story with your children and motivate them to get started with a Roth IRA as soon as they get their first paycheck. For more great posts on this subject, visit my friend Jeff Rose‘s site. He started a “Roth Awareness” movement that ended up with over 130 bloggers writng on this subject today. Do your children have a Roth? Has it impacted them? How?


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