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Are you a parent searching for the best way to save money for your kids’ future? If so, investing in a Roth IRA account may be the right choice. A Roth Individual Retirement Account (IRA) is specifically designed to help individuals invest money and reap its benefits tax-free over time. Investing in a Roth IRA provides numerous advantages such as tax exemptions, interest compounding, and up to $6000 yearly contribution limit per donor making it one of the most beneficial investment accounts that parents can make on behalf of their children. And, one of the little known secrets is that there is no minimum age limit to make any type of IRA contribution.
Parents can establish Roth IRA’s on behalf of their minor children setting them on the road to financial independence! They just need to have earned income – babysitting, mowing lawns, part time jobs, etc. They may be used in addition to the popular 529 Savings plan.
Investing early and consistently over time provides incredible advantages. The earlier the better! The time value of money is a wondrous thing. There is a reason Albert Einstein said it was the 8th wonder of the world! So keep reading if you are looking for more information about setting up a Roth IRA account for your child!
Here are some of the benefits of Investing in a Roth IRA for a child. Consider IRA’s through Charles Schwab, Fidelity, or Vanguard.
Investing tax-free early
In a Roth IRA, the principal portion (the amount you put in) can be withdrawn tax-free and penalty-free at any time for any purpose. Earnings in a Roth IRA grow tax-free and can be withdrawn tax-free and penalty-free only after you reach retirement age. A key benefit of Roth IRAs is that distributions are not taxed as earnings until the entire principal balance is withdrawn. That means you can take out as much as you put in tax-free to pay for college and withdraw the earnings portion tax-free when you turn 59 1/2 for retirement or whatever you wish.
Flexibility in using funds
Distributions from your 529 plan are only tax-free if used to pay for qualified higher education expenses or K-12 tuition. Roth IRA accounts offer tax-free return on contributions at any time, as well as all distributions held for five years and if the account holder is aged 59 ½. This means with a Roth IRA account your child can use the funds for higher education or use to purchase their first home or save it for retirement.
No effect on financial aid
Retirement accounts are not considered assets on the Free Application for Student Financial Aid (FAFSA), which means the value of your Roth IRA won’t hurt your chances for financial aid eligibility. On the other hand 529 plans are considered assets, and may reduce financial aid eligibility by 5.64% of the asset value if owned by a dependent student or a parent.
