Guiding your kids on the path of saving for their future gives them a head start to financial independence. Creating a Roth IRA for kids provides more flexibility for your children before they reach adulthood than other options.
Parents can influence their children’s healthy money habits early by teaching them to save money and spend less to invest for their future. They can open a Roth IRA custodial retirement account at any age so long as their child has earned income.
Differences between 401K and IRA Retirement Accounts
Individual retirement accounts (IRAs) differ from the 401K employer-sponsored retirement plans offered to employees by many companies, often with an employer’s match contribution.
There are two types of IRAs: Traditional IRA and Roth IRA. The amount contributed to a traditional IRA reduces your tax liability. Investments inside the IRA accumulate tax-free.
You fund a Roth IRA with after-tax contributions, which grow tax-free. Roth IRA withdrawals are tax-free, unlike the traditional IRA, which requires deferred tax payments at the current tax rate of the account holder.
Although you could set up a traditional IRA for your child, the contributions to a Roth IRA benefit from the likelihood that the child’s earned income will have a relatively low tax rate when you’re contributing to their account.
A Roth IRA is preferable to a traditional IRA with after-tax contributions, tax-free growth, and withdrawals. Although it is a retirement account, you can use your account for qualified education expenses.