If you have a student who is just getting started financially – whether they have a summer gig or their first post-grad job – you can help them kick off their investing with a Roth IRA.
Beginning in 2024, if you have money left over in a 529 plan, you can roll up to $35,000 of it into a Roth IRA. Over the course of 50 years, that $35,000 could grow into more than $4 million.
But even if you don’t have any money left in a 529 plan, you can still get your student started with an IRA as long as they have earned income.
What is a Roth IRA for students?
An IRA is a retirement account that allows you to save for retirement with some tax benefits. There are a few different kinds of IRAs, including traditional, Roth and rollover accounts.
For the purpose of this article, we’re going to look at Roth IRAs, which use after-tax money and allow your deposits to grow tax-free, with tax-free retirement withdrawals (if you meet the requirements.)
We’re focusing on Roth IRAs because minors and young adults tend to have less money at first, but reach higher tax brackets in the future, so this is a more beneficial option than traditional IRAs, which allow you to deduct contributions on your tax return.
Even very young kids can contribute money to a Roth IRA, as long as it’s earned income. That could include money from an employer or even their own business, like running a lemonade stand. Your child can contribute up to $6,500 of their taxable earnings for the year.
What is a Custodial Roth IRA for Students?
Custodial Roth IRAs are just like regular Roth IRAs. The only difference is that a custodial Roth IRA is for a minor, so an adult has to be assigned as custodian. But the child is still able to make contributions to that account.
When your child reaches the legal age in your state (typically 18 or 21), the custodial Roth IRA has to be converted into a regular Roth IRA in your student’s name.
Make sure they understand how to run the account on their own before you hand the account over. For the most part, however, contributing to the account is the same as a minor and a legal adult.
The Power of Compounded Growth
The earlier your student starts investing, the more earning potential they have over time.
For example, if you invested $5,000 in a Roth IRA today and earned six percent, in 30 years it would be worth more than $28,000. If you invested $100 per month for 30 years, your total value would be almost $100,000 ($98,869) of tax free funds.
So even a little bit of money contributed over time can result in significant earnings.
Why Choose a Roth IRA for Your Child
Many parents open a savings account for their child to hold their holiday and birthday money, but once they’re earning income, a Roth IRA is an excellent tool for introducing them to saving and investing.
No amount of money is too small and no investor is too young to contribute to a Roth IRA, as long as the money is earned income. So whether they’re babysitting or kicking off their career, a Roth IRA is a smart, accessible intro into the world of investing.