Most parents want to prepare financially for their child’s future to increase the amount of opportunities that are available. For those who want to grow their wealth at a steady pace, a Roth IRA is a viable option that can offer financial stability. When considering the investment option, there are a few ways that it can benefit your child.
Teach Valuable Financial Lessons
You can put a small amount of money in a Roth IRA to teach your child about how money grows over time, which will instill patience in them as they watch the earnings increase each year. This will allow them to have a greater understanding of taxes and interest, which will help them to value the money and learn how to manage it as they develop.
Pay for Education or Other Expenses
Your child will have the option of tapping into their account to pay for their college education, which can allow them to avoid acquiring debt at an early age with loans. Any contributions can be withdrawn without being penalized, making it easy to have the necessary funds available at all times. The child can also choose to use the money for a down payment on a home with up to $10,000 that can be deducted without a penalty.
They can also choose to use the money for emergencies, although the money will be taxed and a 10 percent early withdraw fee will need to be paid. If the child waits to withdraw the money for retirement at the age of 59 1/2, they can avoid taxes.
Your beneficiaries on the account can obtain tax-free income that is stretched over time, which will allow you to prepare for your child’s future. You can prepay taxes for future generations to ensure that your child and grandchildren are set up financially. This can allow your child to grow their wealth at a faster rate. You’ll also have the ability to control all of the assets until your child turns 18.
Help Children Make Choices Early
Opening a Roth IRA for your child will teach them how to make financial decisions early on without expecting the reward of it immediately. They’ll learn to set financial goals that they can work towards while having patience as the money grows at a slow and steady speed. This will allow them to learn the value of a dollar and remain conscious of both their saving and spending habits.
Teach Kid the Power of Compound Interest
The concepts of compound interest will be easier to understand for children when it relates to their own money. Kids will want to get a clearer picture of the history of their money and how it accumulates over time with an index fund strategy in place. This will allow them to learn how to avoid making decisions based off of their emotions, especially if the market is not as strong or stable in the future.
David Milberg is a financial analyst from New York City.