Many people struggle with financial literacy so it's important to start teaching and training your kids how to understand and utilize money while they're still young.
No age is too young and no amount of money is too small. You can make a big difference in their lives by encouraging and empowering them to build wealth through IRAs so they can start investing today for their future!
Qualification
First, they have to have earned income. You can't contribute to an IRA for a child through gifting or anything else. Your children have to earn money as either 1099 income or W-2 income.
If your child earns money, your child can do a Roth IRA. There is no age restriction. There are a lot of younger children who are even crawling around that are making some money, such as those on Huggies commercials.
Amount of Contribution
There is a limit that changes every year. They can contribute up to 100% of their earned income to a maximum of $6,000 in 2021 and 2022.
Conversely, no amount is too small. The most important thing is to get them into the habit of investing their money. There are education and mindset pieces that come into play here.
If your child, for instance, had the opportunity to earn $12,500, they could earn that money tax-free and then they could contribute up to $6,000 into an individual retirement account. They have to have that funded either by 12/31 of the tax year they are in or before they file their tax return in the next year.
How to Set Up an Individual Retirement Account
Working with a financial planner advisor is helpful. We highly recommend that your kids set up a Roth IRA because they are young enough so they still have time for their money to grow tax-free.
The Benefit
Your kids are being taxed on the money they're earning now, they get to contribute to their Roth IRA post-tax, and that money gets to grow federally tax-free. Then, when they pull it out, they don't pay tax on it. So they're making money tax-free.
Roth IRA is the best vehicle out there because they're within the income restrictions to qualify for that and it will grow tax-free. They only pay tax on the year they earned the money. If they didn't go over the standard deduction, they don't have federal tax.
If you want to learn more about helping your kids build wealth with IRAs, check out Episode 084: How to Help Kids Build Wealth with IRAs.
