How To Open A Retirement Savings Account For Your Kids And Help Them Accumulate $1M Before They Reach 50

Originally Published Jul. 10, 2019

Do your kids have a summer job or are they helping you out in the family business? If they are making money, they can get a head start on a retirement savings account.

The 2017 Tax Cuts & Jobs Act has increased the amount of tax-free money that individuals can earn. Previously, single taxpayers had a standard deduction of $6,350. Now the standard deduction is $12,000, leaving you with more tax-free money that can be allocated toward your current and future goals. What better way to help a child build a strong financial foundation than by helping them put more money toward a retirement account before reaching 18 years of age!

In order for a minor to qualify for an individual retirement account, your child needs to have earned income from traditional or self-employment opportunities such as babysitting, mowing the lawn, or tutoring. Also, the amount that a minor contributes in 2019 cannot exceed $6,000 or their current earnings in a given period, whichever amount is lower.

Ready to prepare your child for future wealth-building opportunities? Here’s how to open a retirement account for your child:

Open a Custodial IRA

Kids of any age can contribute to a retirement account like a Roth IRA as long as a parent or adult opens the account as a custodian. A custodial Individual Retirement Account gives the parent permission to control the investments in the IRA until the child reaches a certain age (usually 18 or 21) but the assets belong to the child.

You can open a custodial IRA through a brokerage firm or bank. Work with a financial coach or CPA to learn how to research and navigate your options.

“Find out who has the lowest fees and the best reputation,” says Jeff Wilson II, author of The Lies our Parents Were Sold and Told Us and principal CPA at The W2 Group accounting firm. Also, determine if you are going to manage your retirement account or have someone else to manage it? If you plan to manage it, find a company that does actively managed portfolios and has a really good brand. Working with a trusted CPA can help you make these important decisions that will provide a foundation for your child’s future wealth-building activities.”

Contribute Money to Your Account

After you have successfully opened a custodial IRA for your child, now it’s time to fund your account. For the 2019 tax year, a person can contribute up to $6,000 to a Roth IRA account as long as they have earned more than $6,000 for the year.

For example, if your child earned $3,000 as a babysitter last summer and that’s the only job they worked last year, then that $3,000 is the most that can be contributed to the account.

But let’s say you hire your child to work in your small business throughout the year and the child earns $12,000 for the year. Not only can the child max out their retirement account with a $6,000 contribution but they also get the benefits of not having to pay taxes on the money they earned.

You don’t have to contribute a lump sum of money at one time. You can make weekly or monthly contributions to your account. Use whatever time frame works best for you. If your child was able to contribute $500 a month toward their retirement account, in 12 months they will achieve the goal of maxing out their Roth IRA account with $6,000.

Choose Your Investments

The parent or adult has control over the type of investments that are pursued in the retirement portfolio. You can take the safe route by parking the money in a money market account or you can take advantage of capital appreciation and dividend income by investing the retirement funds in assets such as individual stocks and exchange-traded funds.

If your child started contributing the maximum amount to a Roth IRA account at 10 years old and received a 7% annual rate of return from investing in the markets, your child will have well over $1 million set aside for retirement before reaching the age of 50! And all it took was starting early and contributing just $6,000 a year of earned income.

Black Enterprise Contributors Network