People often think of a Roth retirement account just for retirement but it can be so much more than that. Did you know you can help your children get a Roth at a young age? Did you know you can use your Roth as a savings vehicle? What about the fact that you don't have to take money out of a Roth 401(k) after the latest SECURE Act 2.0 law passed at the end of 2022? These are just a few of the benefits of a Roth that you can take advantage of.
Helping Children Save
Do you want to see your children get a head start on saving for retirement, or even college? A Roth IRA could be the perfect investment vehicle for them. As long as they have earned income, whether from a W-2 job or from mowing lawns, shoveling snow, selling lemonade or whatever their means of income generation is, they can qualify for a Roth IRA. The limits to the Roth is a maximum of $6,500/year for 2023, but it is further limited by your earnings. In other words if they made $3,000 for the year, they can't contribute more than the $3,000.
You might say your child wants to spend their earnings on candy, toys and electronics for example, so they aren't going to put the money away. There is a way around that. What if you tell them that you will gift them whatever money the put into their Roth IRA (or 50 cents on the dollar for example). They put their earnings into their Roth and you give them money to spend. If you are a business owner this one is a real winner. You can hire your children for bona-fide work (meaning they really have to do work for you), you can take a tax deduction for the expense of paying your child and they can save in their Roth.
College
The little known secret to a Roth is that the contributions can be taken out tax free at any time. In other words if you contributed $10,000 to the Roth and now it is worth $12,000 you can take out up to $10,000 without paying tax or penalties. This means it can be used for college and because the money is in a Roth IRA rather than a 529 College plan, it may not even count as an asset for FAFSA college planning purposes.
Buying a House
Just like saving for college, if your child started earning money at 10 years old and by age 25 has $60,000 in their Roth IRA, all they have to do is calculate (or look up in your records) how much of that money was contributed. Once again this is because you can only take out the contributions, and not the growth. The growth portion must remain in the account until age 59.5.
Tax Free Growth
One of the nicest things about a Roth IRA is that all of the earnings are tax free. If your child never needs to take money out of their Roth IRA that's even better. Imagine how much money they might have for retirement if they start saving $6,500 per year from age 10 through retirement age, not considering the fact that the contribution limit will continue to rise over the years.
If you would like help setting up a Roth IRA for your child, reach out to us at www.redbarnfinancial.com, call us at 615-619-6919 or email smoran@redbarnfinancial.com to set up an appointment
Disclaimer: The information contained in this article is not meant to be tax, legal or financial advice. The purpose of this information is for education. Please speak with a licensed financial advisor prior to making any financial decision.