Opening a Roth IRA for a Child

hey what's up everyone and welcome to the school of personal finance so as many of you already know I am a big fan of Roth IRA and the earlier you could get started the more powerful they are going to become with that tax-free compounding growth so in this video I am going to walk you through how to open up a Roth IRA for your child I'm also going to quickly cover the benefits of doing so and the requirements to be able to open one up for a child all right I hope you find this one helpful let's get to it real quick head over to school of personal finance.com jump on my email list download the free budget template I send out resources throughout the year also check out I'm in the beginning stages of creating a personal finance course for high school and college students this way they can learn everything they need to know before they get out into the real world I'm going over all personal finance topics and doing case studies so they could see real life examples so check that out all right so let's quickly start out by talking about all the benefits of a Roth IRA especially for children children the requirements and then I'll go ahead and I will share my screen with you and walk you through opening a Roth IRA a custodial Roth IRA for a minor at Fidelity all right so a Roth IRA is a retirement account okay it is money that you are putting away for your eventual retirement but roths do have some flexibility so let's start with the basics so with a Roth IRA in 2024 you could contribute up to $7,000 into a Roth IRA one of the big requirements though and this is where it's tough for children for miners is that you must have earned income to be able to contribute so let's say for example your child has a summer job where they make $2,000 and they get a W2 it's on the books they would then be able to contribute up to $2,000 into a Roth IRA if they made $20,000 throughout the year then they would be capped at $7,000 all right if they make $200 throughout the year then they can only contribute up to $200 if they don't work if they don't have earned income then they are not eligible to contribute to a Roth IRA so that is typically the biggest hurdle when wanting to contribute to a Roth IRA for your child and it doesn't have to be their actual money that they receive from their paycheck so your child could make two grand they could go ahead and spend it throughout the summer and then you could go ahead and contribute $2,000 on their behalf you could gift it to them so to say and that is still fine just as long as it's not more than the amount that they have into earned income throughout the calendar year so now Roth IRA it is just a type of account right it's like the shell inside of a Roth IRA that's where you have to decide what to do with the money so you could open up a Roth IRA for your child you could put say $2,000 is the amount that they are eligible to put in you put in the two grand once it's in there then you have to decide how to invest it so you can invest it in individual stocks in index funds and whatever is offered through the broker that you use and then that money it is going to grow taxfree so that is the big advantage of a Roth is as long as you follow the rules you will never pay taxes on that money again so the earlier you start out in life the more years you have for that money to grow and compound now with a Roth IRA you don't get any tax deduction in the year you make the contribution which is great for kids because typically they're only making a few grand anyway and they really won't owe much if any income taxes on that so they're able to put in that money after taxes which is going to be very little if any and then that money is going to grow taxfree forever and now Roth IRA they provide some extra flexibility as well so with a Roth IRA you can take out the amount that you have put in the contributions that you have made at any time without any taxes or penalties so I made a video it's got to be four years ago now talking about how much I love my Roth IRA and how I used funds inside of my Roth IRA to buy my wife's engagement ring when I was younger and how that ended up being the most expensive ring of all time because if I would have just left that money and let it continue to grow tax-free it would be worth a hell of a lot more right now but I jokingly say you know that it was a uh it was the worst decision of my life but obviously I'm still happily married so I'm only joking but um but so you have flexibility right you could take money out so say for example 5 years down the road your child wants to purchase a car and they have put in a total of $122,000 into their Roth IRA and now it is worth $155,000 cuz it has grown through the years they are able to take out that $122,000 with no questions asked no taxes no penalties they could just go ahead and take it out now learning from experience it's not a great idea to do that I wouldn't recommend you doing that but you do have the flexibility to do so if need be so there are some instances where you could also take out growth in the account before age 59 and a half so remember I just said you could always take out your cont contributions but if you want to take out some of the growth there are some circumstances you can one of them is as long as you've had the account open for 5 years you could take out up to $10,000 for a firsttime home purchase other reasons would be if you had a disability or a death then you'd be able to take it out without any taxes or penalties so Roth IRAs they do provide more flexibility than traditional IRAs or retirement plans like 401ks or 403bs now you cannot take loans against Ira accounts so against a traditional or a Roth IRA so now if your child is under the age of 18 then you have to do a custodial Ira so you were going to have to open it up for them you have control over the account but it is like an ugma account a uniform gift to miners act so the money is your child's money and then when they turn the age of majority then the money the account is turned over to them and like in Fidelity they make it very easy where your child once they reach whatever the age of majority is in your state typically it's 21 years old but once they they reach that age they open up their own Roth IRA and then you just transfer the custodial one into their own Roth IRA all right and to just show you a quick example of how powerful this could be here's just an online calculator that I found if you start contributing at age 14 all right and if you could do $6,000 a year so maybe that's not realistic for a 14-year-old if they're not really working throughout the year let's just make the assumption that it is I don't have it increasing in later on years so just staying at a level $6,000 per year and do that from age 14 all the way up until age 60 and you invest in a broad-based stock market index fund like the s&p500 will just make an assumption of an 8% rate of return which is very realistic at age 60 in a taxfree vehicle a Roth IRA your child would end up with $2.7 million so that is pretty crazy to think about all right so let's head over to Fidelity so if you just Google Fidelity Roth IR for kids this will come up and it brings you to the Fidelity website and as you can see they have the green button right there to open an account and they also have a bunch of educational content on here as well so you can go ahead and research a little bit more before you actually open the account but I'm going to click on open an account right here and now mine actually is going to look a little bit different because I already have a Fidelity account so if you don't have a Fidelity account then they're going to go through you know asking you for your personal information and getting it all set up for me because I already have an account for Fidelity they already have all of my information so it just basically prefills here so this is all my information first and then I go ahead and I click on next and it's going to bring me to information to put in for my child so as you can see you have to put in their name their social security number right their date of birth are they a citizen what is your relationship to them um what state are you living in because states have different rules around U Miners and then where does the minor live and we're going to go ahead and we are going going to click next all right and then just take a minute to confirm everything so go through make sure that you have all the correct information in here for you for your employment information all right and now my account is open they've given me an account number it's called Roth IRA for kids so now I can just go ahead and link my bank account to transfer money into the account all right so I'm just going to skip ahead here I to go through the verification process of linking my bank account but it's pretty simple they just send me you know verification text message and um and I link it to my Wells Fargo Bank account all right and here's my success so now my bank account is linked to this Roth IRA account for my son and now all I have to do is I go in and I transfer money from my bank account into this Roth IRA and once I go ahead and I do that electronic funds transfer maybe it'll take a day or two for the funds to get there then the money's inside of the Roth IRA as a contribution and I could go ahead and I could then invest that money in the market so overall not a very complicated process it's very simple to go ahead and open up a minor a custodian Roth IRA is the correct term for it and then once my son turns the age of 21 here in New York then this money will become his he'll be able to take over this Roth IRA and continue hopefully down the path of maxing it out every year and saving that money for his future all right so I'm going to leave it here for this one I hope that you found this video helpful let me know in the comments down below I do believe that opening up a WTH for a minor if you're able to do it if they have that earned income it is a very powerful way to give them a head start in life so drop a comment down below let me know if you enjoyed this video I'll see you again in the next one thanks