As parents, we’d like to do everything possible to help our children lead an amazing life. One way to set them on a great path to financial wealth is to open an IRA while they are young. This will allow them to begin saving for retirement very early in life and ultimately help them have more than enough money once they reach retirement age.
The Truth about Opening an IRA for Children
Believe it or not, many people fail to realize that they can open an IRA for their child at any age. In fact, you can open the IRA for the child the very day they are born and make a contribution right away. There are no age limits whatsoever, although an adult will need to act as their custodian until they reach the legal age, which is 18 years old, 19 years old, or 21 years old depending on the state you reside in.
So, if you’re trying to put your child in an advantageous position by the time they reach retirement age, which will likely be 70 years old or more in the future, you should definitely start contributing to an IRA as soon as possible.
Guess what? If you were to open an IRA for your child the year they were born and contribute $1000 a year for the first 19 years, the IRA would be worth more than $2 million at 8% compounded interest, which is more than likely a legitimate scenario.
As you can see, your $19,000 gift will help your child become a multimillionaire by the time they reach 70 years old. And the best part is they don’t even have to contribute to the IRA account at all as an adult. They can let your money ride and still make a major score during retirement.
The Benefits of Starting an IRA for Your Child
As you can imagine, there are definitely major benefits to setting up an IRA for your child. But there are also specific things that need to take place for your child to contribute to their IRA. The benefits and specifics include:
- No age restrictions – the biggest benefit that you’ll immediately see is that there are no age restrictions for children looking to contribute to an IRA. This is a good thing because it helps youngsters begin saving for their retirement as early as the year they are born. But there is one caveat though. The contributions to the IRA have to be earned income. So you’ll have to figure out a way to create an income for your child in order to make these contributions.
- The child will need a custodial IRA – it shouldn’t surprise anyone to learn that a child under the age of 18 must have a custodian manage their IRA account until they become an adult. Since most online brokerages don’t offer the option to sign up for a custodial IRA online, you’ll need to shop around to find a local branch in your community. It’s possible to go to Charles Schwab and Fidelity since both of these companies provide custodial IRAs as an investment option.
- Defining earned income – according to the IRS, earned income is basically taxable income and wages, which also translates into money a child earns from a job. They can get it from being self-employed as a dog walker or a babysitter. Or they can generate this income from a job with an actual W-2. Again, if you’re starting this while your child is really young, you’ll have to come up with a legal way to make it possible for your child to earn a taxable income according to the rules of the IRS.
- Huge growth potential – the best thing about opening up an IRA for your child while they are very young is the huge potential growth for their account. We gave one example already where a $19,000 investment compounded into more than $2 million over a lifetime. But if you and your child contribute more than that, the IRA account could be worth millions upon millions of dollars throughout their working life.
Also check out our post on building long term wealth with a ROTH Ira.
Clearly, it’s would be amazing to open an IRA for your child while they are very young. Those early contributions can and will turn into serious money over their lifetime. You could literally invest as much is $19,000 early on and it will grow to more than $2 million by the time your child is 70. Talk about a major advantage later on in life! Get started on this right away.