Is a Roth IRA good for a child?

Roth IRAs are ideal for kids, because children have decades for their contributions to grow tax-free. And these accounts offer flexibility, too: Contributions to a Roth IRA can be withdrawn tax- and penalty-free at any time.

Can a parent make a Roth IRA for their child?

Any child, regardless of age, can contribute to an IRA provided they have earned income; others can contribute too, as long as they don’t exceed the amount of the child’s earned income. A child’s IRA has to be set up as a custodial account by a parent or other adult.

How does a custodial Roth IRA work?

Custodial Roth IRAs are funded with your child’s post-tax dollars. When they’re ready to withdraw the money for retirement, they won’t need to pay income tax on it (unlike traditional IRAs).

What happens when a child inherits a Roth IRA?

When you inherit a Roth IRA, the money you receive gets the same tax-advantaged treatment as the original account. Because the money was contributed on an after-tax basis, you can withdraw the contributions at any time without paying tax or penalty.

Does a child Roth IRA affect financial aid?

It Won’t Impact Their College Financial Aid Eligibility Retirement accounts aren’t reported as assets on the Free Application for Federal Student Aid (FAFSA), so your kid can keep stashing money in a Roth IRA without worrying about it affecting their financial aid.

How much can a child earn without paying taxes?

Earned Income Only For 2019, the standard deduction for a dependent child is total earned income plus $350, up to a maximum of $12,200. Thus, a child can earn up to $12,200 without paying income tax.

Can a grandparent set up a Roth IRA for a grandchild?

A child of any age can own a Roth IRA as long as he earns income from a job. A grandparent can provide the money for a grandchild to contribute to his account, but the amount can’t be more than what the child earns for the year. Nor can the funds a child puts into an IRA come from money invested in the child’s name.

Can Roth IRA be inherited tax-free?

You make your Roth contributions with after-tax money, and any distributions you take are tax-free as long as you are at least 59½ years old and have had a Roth IRA account for at least five years. Your beneficiaries can continue to enjoy this tax-free status for a period of time after they inherit the account.

Can a child Roth IRA be used for college?

You may know the Roth IRA as a retirement vehicle, but you can also use it to save for college. Young investors—including teens—can really take advantage of a Roth IRA because they pay taxes now when they’re likely in a low tax bracket.

How does a child savings account affect financial aid?

If college savings accounts are in your name rather than your parents’, they will be factored in at a higher percentage, therefore lowering the amount of financial aid you would receive. However, those same college savings accounts will have less of an impact if they are in your parents’ name.