Can we think of retirement savings too early? Rick Pendykoski of Self Directed Retirement Plans doesn’t think so. He discusses implementing individual retirement accounts (IRA)… for kids.
Despite being a powerful tool, individual retirement accounts (IRA) remain vastly untapped for kids because most people are unaware of the fact that anyone can fund an IRA as long as they have earned income. So, while IRAs are a popular way of saving for retirement among adult investors, they also make a huge head start for kids who, because of their age, can make the most of time and the magic of compounding interest. If you set up an IRA for kids now, the money will have a longer time to multiply and this will provide your kids a perfect start for retirement savings. But before you make this smart move on their behalf, be sure to check out the eligibility rules.
The eligibility criteria for kids
Here are all the important things that you need to know about opening an IRA for kids:
- Your child must have earned up to $5,500 from work, during that tax year.
- This earned income is inclusive of taxable income and the wages earned from working for someone or from working for the family business.
- The money cannot be a gift or an allowance.
- The contribution that parents make towards the IRA for kids will be counted against the limit applicable on tax-free gifts, which has been revised to $15,000 in 2018.
Types of IRAs for kids
Parents have two different investment options for their kids: Traditional IRA and Roth IRA. It is worth understanding the fundamental differences between both the types of IRAs for kids so you select the best investment option. Here’s a quick overview of each investment account to help you see how they differ:
Traditional: The taxes are to be paid on withdrawals during retirement, the money grows tax free, a traditional IRA offers an up-front tax deduction if your child’s income exceeds $6,300.
Roth: The taxes are to be paid when you put in the money; Roth IRA contains earnings after tax so even if your child withdraws money after decades, it is not going to be taxed; Roth IRA is an ideal choice for minors who typically have limited income and don’t need a deduction.
Advantages of having an IRA for kids
An IRA for kids allows a longer time horizon for the compounding interest to kick into high gear, so it acts as an incredible backup saving for retirement. Even a small IRA with an investment of just a hundred dollars is an ideal opportunity for parents to reinforce the value of earning money and saving for retirement.
Since retirement income is likely to be the last thing on your child’s mind, starting an IRA is the best way to plant the idea in their minds that starting today with a small investment will secure their future tomorrow. Kids may not be able to appreciate the concept of compound interest now but they will definitely understand the fact that their money will grow massively over time and they may be able to tap it for higher education or for purchasing a first home, or in case of emergencies.
Self-directed IRA – your key to building astronomical tax-free savings
Anyone, of any age and gender, can have an IRA, as long as they have earned income, but if you want to build real generational wealth for your children, you need to look beyond Traditional and Roth IRAs. While IRAs for kids come with a fixed set of investment options like exchange-traded funds (ETF), stocks, bonds and mutual funds, a self-directed IRA brings you the freedom to invest in more lucrative options. With a self-directed IRA for kids, you can invest in precious metals, private company stock, real estate, intellectual property (IP) and everything that is not being directly beneficial to you at this moment. This way your children will enjoy the growth of these investments tax free – forever!
If you want your kids to not only have a mind-blowing retirement reserve but also a legacy that they can pass on to your grandchildren tax free, start a self-directed IRA for kids today and tap the tremendous advantage in Time + Interest.
Rick Pendykoski is the owner of Self Directed Retirement Plans LLC, a retirement planning firm based in Goodyear, Arizona, USA. He has over three decades of experience working with investments and retirement planning, and over the last ten years has turned his focus to self-directed accounts and alternative investments. Rick regularly posts helpful tips and articles on his blog at SD Retirement as well as Business.com, SAP, MoneyForLunch, Biggerpocket, SocialMediaToday and NuWireInvestor. If you need help and guidance with traditional or alternative investments, email him at email@example.com.