Roth retirement accounts for kids seem to be catching on with parents, grandparents and the investment business.
The accounts, which combine the benefits of socking away money for the future with tax-free growth, have no age requirements. All it takes to open a Roth individual retirement account is money earned from baby sitting, grocery sacking, burger flipping or any other job.
Youngsters can invest up to the amount of income they earned for the year — to a maximum of $5,500. So if your 16-year-old daughter made $1,000 from working at a restaurant last year, she could invest up to $1,000 in her Roth.
Still, Roths for kids have always been a tough sell. Face it, when you’re trying to save every dollar in the family budget for college tuition, building a nest egg for your son or daughter to tap 50 years from now seems laughable. And retirement planning isn’t exactly a priority with kids.
Some financial firms have steered clear of offering Roths for kids partly because of the cost of administering accounts that have relatively small balances. Other companies require high minimum investments or monthly deposits that are too steep for youngsters just getting started.
That’s what makes Fidelity Investments’ entry into this market noteworthy. The mutual fund behemoth formally launched its kid-friendly Roth IRA at the start of this tax season. It joins other investment companies with kid-friendly retirement products, including Vanguard, T. Rowe Price and TD Ameritrade.
Fidelity’s Roth IRA has no minimum investment to open an account and no annual fees. Since minors cannot legally open an account in their own name until they are 18 or 21, depending on state laws, an adult must serve as custodian to control the account.
Fidelity’s decision was driven by parents and grandparents, said Keith Bernhardt, Fidelity’s vice president of retirement and college products.
“The number of conversations with our customers about Roths for their child or grandchild has been creeping up over time,” Bernhardt said. “It seemed appropriate to be offering it now.”
Bernhardt said he understands the “push/pull” that families face in trying to save for college and helping their kids invest for retirement. But he notes that Roths can be used to pay for qualified higher education bills. But be aware of potential tax implications: For most parents who are sending their kids off to college, only the contribution portions of their Roth IRA balances can be withdrawn tax-free.
Keep in mind that parents and grandparents can contribute to a child’s Roth. For example, a child might contribute a portion of his or her paycheck to the Roth, and you match that amount within the maximum limits. Or you can contribute the entire amount. It doesn’t matter where the contribution comes from.
You have until April 15 to make a Roth contribution for 2015.
There’s another important role for parents and grandparents — explaining to a child or grandchild the benefits of saving for the future, the impact of taxes and how to make good choices about money. While showing them how $1,000 invested today can turn into tens of thousands of dollars years from now may get their attention, it’s just the starting point.
Steve Rosen: 816-234-4879