Parents often open savings accounts for their children. Few think of starting a retirement account for a 10-year-old.
At Fidelity, the average Roth IRA for Kids account size was $ 3,801 as of the end of June. The investment firm said the number of new accounts jumped nearly 500 percent since they were introduced in 2016.
Now, Fidelity, Charles Schwab and TD Ameritrade offer custodial Roth IRAs with no minimum investment and no maintenance fees. Others, such as T. Rowe Price and Vanguard, have a minimum investment of $ 1,000.
The adult is the “custodian” and maintains control of the account and invests on the child’s behalf until they meet the required age, which varies by state but is generally age 18. And unlike a traditional savings account, a Roth IRA lets you and your child pick and choose investments, which can make a substantial difference on your rate of return.
The minor can then use those funds for college costs or other expenses, like a down payment on a first home.
While traditional retirement accounts have many restrictions about taking the money out, Roth IRA account holders can withdraw their contributions at any time without taxes or penalties.
Plus, after the Roth IRA has been funded for five years, your child can take out up to $ 10,000 in earnings — as well as any contributions — without having to pay taxes or penalties on those funds.
There are other tax advantages, as well: Contributions to a Roth IRA are taxed up front and then withdrawals in retirement are tax-free, which is a big perk for young savers who are in a lower tax bracket now than they will be later in life.
But for financial beginners, simply leaving that money alone for that long could be the greatest challenge — and that’s where parents come in, said Maura Cassidy, a vice president for retirement at Fidelity.
“Make sure the child understands what the account is set up for. It’s not set up to buy the latest tech device,” she said. “It’s an opportunity to have a great conversation about saving for the long term.”
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