IRAs for Kids

If your child has earned income from outside the household, such as from a summer job or babysitting, consider opening an Individual Retirement Account (IRA). For 2020, your child can contribute $6,000 (or his or her earned income, whichever is less) to an IRA.

Just how important is it to start an IRA for your child now? Suppose your 15-year-old daughter saves $800 from babysitting and purchases a Roth IRA. If she makes no additional contributions and the funds grow 8% annually, she will have accumulated more than $37,000 by age 65, which will be tax free upon withdrawal. Or, suppose she opens a Roth IRA with $2,000 at age 15 and then makes annual contributions of $2,000 for the next 10 years. The value of her tax-free account at age 65 will be about $700,000 if the annual growth rate is 8%.

NOTE: The previous hypothetical examples are for illustrative purposes only. They are not intended to reflect an actual security’s performance. Investments involve risk and may result in a profit or a loss. Seeking higher rates of return involves higher risks.

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Consider a deductible IRA, ROTH IRA, and Coverdell Education Savings Account for your child.
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