Opening a Roth IRA for a child can be a powerful way to set them up for financial success. This retirement account, funded with after-tax dollars, offers unique advantages that leverage a child’s long-term horizon. Here are the key benefits:
Tax-Free Growth and Withdrawals: Contributions to a Roth IRA grow tax-free, and qualified withdrawals in retirement (after age 59½) are also tax-free. For a child, decades of compounding can turn small contributions into substantial wealth. For example, $1,000 invested at age 15 could grow to tens of thousands by retirement, assuming average market returns.
Flexibility for Future Needs: Unlike traditional IRAs, Roth IRAs allow contributions (not earnings) to be withdrawn penalty-free at any time. Additionally, earnings can be withdrawn penalty-free before age 59½ for specific purposes, like a first-home purchase (up to $10,000) or qualified education expenses. This flexibility makes it a versatile savings tool for young people.
Encourages Financial Literacy: Setting up a Roth IRA introduces children to investing and saving early. Parents can match contributions from a child’s earned income (e.g., from a summer job), teaching them the value of saving and investing. The account must be funded with the child’s earned income, up to the annual limit ($7,000 in 2025 or their total earned income, whichever is less).
Low Costs, Big Impact: Starting early maximizes the power of compounding. Even small, regular contributions can grow significantly over time. For instance, contributing $3,000 annually from age 16 to 21, then stopping, could outpace larger contributions started later in life, thanks to the extended growth period.
Estate Planning Benefits: Roth IRAs don’t require minimum distributions during the owner’s lifetime, allowing the account to grow for decades. If inherited, the account can continue growing tax-free for beneficiaries under certain rules.
The custodial account is set up under the guardian’s name until the child reaches adulthood (typically 18 or 21, depending on the state). The process is straightforward and by starting a Roth IRA early, parents can give their child a head start on building wealth, fostering financial independence, and securing a comfortable retirement.
Reach out to the financial advisors at Kerr Wealth Advisors in Blue Bell, PA to open a Roth IRA for your child, grandchild, or other loved one.
H. Brad Kerr IV, Vice President/ Wealth Management, Financial Advisor
215.619.3926/ bkerr4@janney.com
1767 Sentry Parkway West, Suite 110, Blue Bell, PA 19422
