I started saving for my kid when they were little. The money was to be used after high-school for whatever direction their life took, such as a start on college, a house down payment, business seed money, etc. Due to their excellent efforts in school, it's looking like college may be paid for by scholarships. Since the money is no longer needed for school, I have been looking at other options. One idea would be to start a Roth IRA for them, and fully fund it until the savings is fully invested. Assuming just the 10% average of the S&P500, if they never add another dollar that they earn in their lifetime, they would still retire as a multimillionaire. My question is, should I push them toward this idea, or continue to let them build what future they will?
Child's saving account
byu/Successfully_Denied inpersonalfinance
Posted by Successfully_Denied
8 Comments
Unfortunately I don’t have an answer to your question but I just wanted to say shout out to you as a parent 🙏 setting your kid up from the very beginning takes intention and smart decision making. Keep it going 🤞
They have to have earned income in order for you to make contributions to their Roth IRA, so if they don’t, the point is moot.
Beyond that, this is the personal part of personal finance. You and your partner, and possibly your children, should discuss how best to use these funds and then store them appropriately.
Making a big, maybe not allowed, leap to the Roth
That’s terrific! Saving early is huge, since compounding over time is your friend… and getting a boost is a great way to start.
You may want to look into the rules though. IIRC, Roth IRAs have an Earned Income Requirement. You must have earned income (salary, wages, self-employment income) to contribute, and the contribution cannot exceed your total taxable compensation for the year. In this case, the “you” would refer to the child – not you, the parent.
Also see [this handy page](https://www.fidelity.com/retirement-ira/roth-ira-kids) from Fidelity – FAQs are at the bottom. The first one is literally titled “How do I know if the child has earned income?”
That said, if the child legitimately works – you could do this. Or you could setup a taxable brokerage, which doesn’t have quite the same impact, but is still a huge leg up. Or you could offset their future contributions (when they’re earning income and contributing to a ROTH or a 401k) with cash gifts…
Besides the earned income requirement I believe the max you can deposit into a Roth per year is 7500. (Not referring to a back door Roth, which would still require an earned income.)
I would do the $7,500 Roth IRA contribution each year if your child has worked and earned at least $7,500. But there are other expenses besides school. Car insurance is often crazy – you could pay that for them while they are in college. Is housing and meals covered by the scholarship? If not, you could pay that.
If this has just been in a savings account for a decade… … You already done messed up… …
“A $100 investment in the S&P 500 at the start of 2015 would grow to approximately $392 by early 2026”
As others said, your child can’t invest in a Roth without earning income. You could open up a 529 and convert that into an IRA though. I don’t know the mechanics because we’re not near that phase.