You’ve probably heard that it’s never too early to start saving for retirement.
The new “Roth IRA for kids” hammers that point home.
The “Kiddie Roth IRA” is a custodial account, where parents maintain control and children are the beneficiaries of investments that grow tax-free.
“I think it’s an awesome way to give a head start to your kids,” financial planner and founder of XY Planning Network Alan Moore tells Business Insider. “If you can put some money in when they’re 16, by 65 it will be substantial savings. Compound interest is a wonderful thing.”
He’s referring to the fact that since retirement accounts are invested, not stored in a regular savings account, savings earn interest — and then that interest also earns interest, so the balance grows exponentially over time. The longer you can leave your money to grow, the better, which is why a few extra years at the outset of saving for retirement have more impact than a few extra years at the end.
However, Moore notes, a kid-friendly IRA has existed for some time.
“It’s not new,” he says. “It’s just a marketing title on Roth IRAs — it’s not different than anything we already had.” He points out that these custodial accounts have the same rules as any other IRA: The parent has to open it for a minor and keep control over it until the beneficiary turns 18, account-holders (in this case, kids) can only contribute up to the income they earn — and they must be earning something — and contributions are limited to $5,500 a year in 2015/2016.
TIME notes that prior to this offering, Fidelity in particular did not allow retirement accounts for minors.
While he doesn’t anticipate custodial IRAs necessarily taking off, Moore has found that some parents like to “match” their child’s earnings from a summer or weekend job by letting the kid keep the cash, and depositing the equivalent amount in an IRA.
The fact that custodial, “kiddie” IRAs aren’t brand new to the market doesn’t mean they’re without merit. “Parents often ask how to give more money to their kids,” Moore says. “If people are looking for a way to jumpstart their kids’ savings, this is awesome.”
But, he cautions, if you want to open a custodial account for your child, you have to know that your kid is well-educated enough not to make a major misstep with the money. “At 18, they get access to the account and can drain it if they want,” he cautions. “In my experience, 18-year-olds don’t usually understand taxes and penalties. You have to be sure you’re clear: This money is for retirement, not for college or for buying a house. If you’re educating them and having those conversations, I think it’s a great way to help them out.”
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