You may not know what an IRA is or why you should have one, and that is something that you should rectify quickly. Establishing an IRA early can mean a lot of tax deferred savings for your family, and your kids don’t have to wait until they are grown to start one. Here’s the scoop.
What is an IRA?
An IRA or Individual Retirement Account is a tax differed saving investment account that allows you to tuck away pre-taxed dollars into an interest earning account toward retirement. The catch is this money cannot be touched until retirement age without substantial penalties or in case of certain types of emergencies, such as uninsured medical expenses.
There are two types of IRA, the traditional and the Roth. The main difference between the two types of IRA’s is with a traditional you pay taxes on the money as you use it at retirement age; with a Roth IRA the taxes are paid when you deposit the investment into your retirement account.
How does a Child Qualify for an IRA?
Since IRA’s were originally established for working adults to get a step up on investing in their retirement, having an income is a requirement in order to invest in an IRA. That doesn’t mean that you have to be over 18 years of age in order to start one; you just have to have a verifiable income from some sort of job. This is a great way to teach your teen whom may have a part-time job that it is never too early to invest in their future.
One way to get around the income requirement in order to start your kids saving off early is if you have a business, you can pay your child to do age appropriate tasks, such as office cleaning, dusting, vacuuming, taking out the waste bins, etc. and pay them an hourly minimum wage. Take all or part of it and have it deposit directly into the child’s IRA account. This is legal and teaches your child early on to save for the future. You will have to efile a tax return on their behalf to account for the income if their income exceeds an IRS set amount; so make sure to balance the income amount to avoid being thrown into a higher than 0 income tax bracket or it may not off-set the tax deferment benefits.
Where to Set-Up a Child’s IRA
Most financial institutions such as Lear Capital or even your neighborhood bank offer some sort of IRA account and can assist you in setting one up. While you are there make sure to look into other retirement savings products that might be a good option for those family members who are closer to retirement and looking to increase their nest egg without paying a lot of taxes on their investments. There are many safe retirement investment strategies to be considered for any age.
The earlier you start saving towards retirement, the more secure and better retirement you and your family will have; that’s why it is crucial to your child’s future to teach them from an early age how to save, and how to save efficiently.