How a Custodial Roth IRA Can Build Wealth for Your Child

Tyler?

Yep.

It’s like your 10-year-old has an IRA that will be worth a little over $63,000 by the time they're 18. Just over $3.7 million by the time they’re 60?

Yep.

Aren’t they a little young to be allowed to do this?

No. This is a custodial Roth IRA. There are no age limits as long as they have earned income. They can contribute the lesser of $6,000 or whatever they earn.

So you had them doing child labor?

No. They babysat, mowed the lawn, and did some dog walking.

Tax Benefits of Contributions

Okay, well good thing we taxed those contributions before you put them in at your 35% income tax.

Sorry, it’s a custodial Roth IRA. Contributions are taxed at the child's tax rate, which is usually around 10%.

Accessing Contributions and Earnings

But remember, they can't touch those contributions until 59 and a half. With a Roth IRA, you can take back the contributions at any time, penalty-free and tax-free, but no touching those earnings.

So you’re really going to be upset. A child can actually take up to $10,000 of earnings for their first home, as long as the account has been open and funded for five years. They can even use some of the earnings on qualified educational expenses.

Conclusion

So what do we get? 10% of what my child makes now, 0% of $3.7 million later.

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