Are you looking for a different way to give gifts to your minor children or grandchildren? Why not get them started on saving for college or retirement? Small gifts invested consistently throughout their youth could provide big rewards down the road.
Technically, a custodial account is any investment or savings account set up and administered by a responsible fiduciary on behalf of a beneficiary. For instance, a retirement account established by your employer would fall under that umbrella. However, a custodial account can also be set up by an adult on behalf of a minor.
Another option would be for the minor to establish their own retirement account, such as a ROTH IRA for Kids. In this case, there is a requirement that contributions can only be made if the child has earned income for the year. Earned income could come from a variety of sources, such as:
- A typical employment situation
- Self-employment like babysitting, dog walking, or lawn care
- Interest earned on a bank savings account in their name
In a ROTH IRA, the contribution limit is equal to the amount of earned income up to $7,000 per year. While the amount contributed might be minimal in the early years, it adds up thanks to compound interest.
In both scenarios, an adult maintains control over the account until the child becomes an adult.
Reasons to Consider a Retirement Account
Opening a college account for your child or grandchild – or niece or nephew – has gained popularity over the last few decades. However, there may be advantages to opening a custodial retirement account instead.
- Your child or grandchild might not go to college or technical school. In that case, they can use the money to purchase their first home, or to jumpstart their retirement savings.
- They can withdraw the principal at any time without penalty. The original contribution can be accessed and withdrawn if needed.
- Contributions to a ROTH IRA are after-tax. For most minors, their tax burden is very low to zero, meaning they get a lot of bang for their buck at this time in their lives.
Want to learn more about helping your kids and grandkids start compounding interest early? Contact one of our knowledgeable wealth management professionals for information!
