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Should Your Kids Get Roth IRAs?

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There are a myriad of options that parents can use to help save money for their kids, from 529 plans to custodial accounts to basic savings accounts. But, if you’re looking to engage your children in the investment process and give them a headstart when it comes to lifelong retirement savings, Roth IRAs may be your best bet.

Just be sure to consider both the pros and cons of Roth IRAs before you open them for your kids. Here’s a look at both sides of the coin to help you make that decision. 

Learn: What Is a Roth IRA?
Traditional IRA vs. Roth IRA: Which Is Best?

Benefits of Roth IRAs for Your Kids

Roth IRAs are great accounts for nearly anyone, thanks primarily to the tax benefits. But Roth IRAs have additional characteristics that can make them especially appropriate for kids. Here are few of the more important ones.

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No Age Limit

One of the primary benefits of opening Roth IRAs for your kids is that they can actually own them themselves. There is no age limit to opening Roth IRAs; so, rather than having to deal with alternative arrangements, you actually can open Roth IRAs in the name of your children directly — although you will have to be listed as a custodian.

Seeing their own investments in their own names can be empowering for children and encourage them to begin lifelong investment programs. Just know that you can open Roth IRAs in the name of your kids only if they have their own earned income.  

Real-World Investment Education

It’s one thing to tell your kids that you bought them one share of Apple stock and then update them annually on its value. It’s something else entirely when you sit down with your kids, ask for their input on which companies or products they like and then have them take ownership of the brands via stock purchases in their own Roth IRAs.

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Good To Know: Roth IRA Contribution Limits for 2022

Although you will have to be the one actually making the stock transactions, seeing how their stocks perform in their own accounts opens the door to real-world conversations about the stock market, how it works and the economy in general. Educating your kids at a young age via their own Roth IRAs is a great way to set them up for lifelong financial success.

Low Tax Bracket Benefits Non-Deductibility of Contributions

One of the drawbacks of Roth IRAs for adults is that there is no tax deduction on contributions, as there is with traditional IRAs. But, as your children likely have no tax liability anyway, getting tax deductions on IRA contributions is of no benefit. In the long run, however, your kids will benefit from the tax-free withdrawals granted to qualifying Roth distributions.

Drawbacks of Roth IRAs for Kids

No investment account comes without some type of drawback. Here are a few of the concerns you should review before opening up Roth IRAs for your kids.

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Investments Are Tied Up

At their heart, Roth IRAs are retirement accounts. For the most part, you can’t withdraw money from Roth IRAs without penalty until you reach age 59½, meaning your under-18 children will have to wait a long time before seeing that money. Of course, this is ultimately in the children’s best interest, as starting from a young age and saving until age 59½ or longer should translate to some significant investment gains. But it can still be a hard pill for some kids to swallow.

Other Accounts May Be More Appropriate

Although most parents wish for a successful retirement for their children, the truth is that most parents won’t be around to see that happen. Thus, most parents prioritize shorter-term goals when it comes to saving for their kids.

Roth IRA vs. 401(k): Which Is Better for You?

But Roth IRAs aren’t necessarily the best vehicles for college savings. Although you can withdraw money from a Roth to pay for college, you’ll have to pay tax on the earnings. This can make options such as a 529 Plan better for college savings. Make sure you know what the money in the Roth IRAs will be used for before you commit to them for your kids. 

Earned Income Restriction

You can’t contribute to your children’s Roth IRAs unless the kids have earned income. But, as this can come from a number of sources — such as dog walking or babysitting — it can be an easy restriction to get around. Plus, it may give your children more incentive to earn money as well, turning this “con” into a plus. 

The Bottom Line

Roth IRAs can be fabulous investment vehicles for your children, as long as you’re aware of the limitations and restrictions. As with any investment choice, it’s best to talk with a financial advisor before you make any commitments to this kind of account. 

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