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

Are your children earning any income? Then they can get a head start on a retirement savings account for kids. Here's how.

Originally Published Jul. 10, 2019

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

For a minor to qualify for an individual retirement account, your child must earn income from traditional or self-employment opportunities such as babysitting, mowing the lawn, or tutoring. Also, the contribution limit for custodial Roth IRAs is $6,500, or the total amount of money your child made during the year, whichever is less, 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 if a parent or adult opens the account as a custodian. A custodial Individual Retirement Account permits the parent 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 will manage your retirement account or have someone else manage it. If you plan to manage it, find a company that actively manages portfolios and has a 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 successfully opening a custodial IRA for your child, it’s time to fund your account. In previous years, the maximum amount that can be contributed to children’s retirement funds has ranged between $6,000 and $6,500 annually or the total amount of money your child made during the year, whichever is less.

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 earn.

You don’t have to contribute a lump sum at once. You can make weekly or monthly contributions to your account. Use whatever time frame works best for you. If your child can 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. Alternatively, 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 age 50! And all it took was starting early and contributing just $6,000 a year of earned income.