Reasons to Set up an IRA for a Child

You can set up an IRA for a child earning even a small income. Though retirement advisers give varied advice, one consistent theme from financial experts is, "start saving early." If you can teach a child the importance of saving for retirement from a very young age, you will help instill the importance of retirement considerations. Further, you gain tax benefits, and the child has a head start to saving for retirement. 

You can Contribute on your Child's Behalf

In order to set up an IRA in a child's name, he or she must be earning an income. You cannot set up an IRA, for example, in your newborn baby's name. However, as soon as your child earns even a tiny income, he or she is eligible. It can be hard to save on this small income. But, you can deposit money in your child's name, and this will grow over your child's lifetime. If you are worried about leaving behind an inheritance for your child, think about the power of this investment. A few hundred dollars now can be as valuable as ten thousand a few decades from now. Remember: it is the child's income you must consider for contribution limits. 

Roth IRAs are Designed for Low Income Earners

A Roth IRA is the ideal option for a low income earner. There is no tax deduction in the current day. This means your child receives no immediate tax benefit. The sum deposited is not deducted from this year's owed taxes. However, in the future, the money will grow tax free. There is no required tax payment at the time the sum is withdrawn. Consider the fact that early withdrawals are permitted to pay for secondary education or even the down payment for a new home. A well-funded Roth IRA can be a wonderful gift when your child begins life on his own or her own.

Interest on Early Investments Grows

The longer a sum of money is in an IRA account, the more it grows. Instead of allowing your child to wait until he or she earns a substantial income to start saving, begin the process early. Show your child how even a small amount of money can grow exponentially for the future. These early investments are the ones that gain and grow the most, so each dollar is proportionally more valuable at this age than later in life.

Teaching a Child to Save is Invaluable

Perhaps the most valuable part of setting up an IRA for a child is the lesson learned. Sure, the financial benefits are strong, but instilling the lesson of saving money is stronger. If your child forms healthy patterns of saving for retirement at a young age, this behavior will continue through adulthood. It is unreasonable to assume your child will make smart financial decisions if you never show what those decisions look like. By setting this example, discussing its importance, and showing your child how to manage a retirement fund, you are providing excellent early financial education.

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