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Types of IRAs for Kids and Their Advantages

Rajhu S GoraaibyRajhu S Goraai
June 18, 2021
inBusiness, Financial Tech
Types of IRAs
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What to Know About IRAs

Social Security was created in order to help Americans save for retirement. The idea of Social Security was to be an assistance to the funds that individuals saved up for retirement.

Unfortunately, too many Americans have not put much thought into their retirement. The truth is that saving for retirement does not have to be difficult, especially when the savings begin at a young age.

IRAs or Individual Retirement Accounts can be started for children as long as they are making income. It can be a big commitment to save for retirement, so parents do well to train their children from a young age to see the importance of saving money for the long haul.

In the past, employers gave traditional pensions, but much of that is changing, so your child’s retirement depends on them. A great way for your child to save for retirement is through an IRA.

What Are the Types of IRAs that are Available for Children?

Your child can contribute to an IRA as long as he or she makes an income. There are two main types of IRAs that children can invest in, and they are a traditional IRA and a Roth IRA.

With traditional IRAs, you pay taxes when you begin to withdraw the money out during retirement. This is all money that was pre-taxed. With the Roth IRA, you pay taxes on the IRA before you put them in the account.

This means that the money in a Roth IRA can grow tax-free. The good thing about a Roth IRA is that your child can withdraw money from this account before he or she reaches retirement age without any penalties. Your child will only get taxed if he or she decides to withdraw the amount of interest that was gained.

What Are the Stipulations for Investing in an IRA Account for Children?

In order to invest in an IRA account, you have to be the custodian of your child’s account since he or she is not over 18. Apart from that, you could only invest up to the allowable amount each tax year.

This means that if your child does not earn enough income to reach the allowable amount, you cannot invest more than what has been earned.

Train your child to invest

There are huge benefits to investing from a young age, so learning how to open an IRA for your child is imperative. A Roth IRA can be a super savings account for your child, and accumulated interest will be your child’s best friend.

When it comes to retirement, it is going to be your child’s responsibility, and if you teach your child to invest in an Individual Retirement Account from a young age, he or she will be able to reap amazing benefits when the retirement age is reached. According to the professionals at SoFi, saving for retirement may be the biggest financial goal many of us will ever set.

In reality, your child will be a multi-millionaire by the time he or she reaches 59 1/2 just by making the minimum investment. Teach your child to save and manage finances at a young age, and he or she will be able to enjoy financial freedom.

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