3 Ways to Help Your Kid Invest - Roth IRA

Video Transcript

Hey, this is Chris with Money Burst, and we've been talking about three ways to help your kids become investors. Now, first we talked about the 529 Plan, so today let's talk about the Roth IRA.

A Roth IRA could be a great way to help your kids start investing for retirement at a super early age, which I think is amazing if you can do it. But before I get into all the details, I thought it'd be a good idea to break down some of the terms I'm going to be mentioning. Just because, you know, they can be complicated and weird and strange.

So first, first of all IRA stands for 'individual retirement account,' and this is something that any of us can open up. It's very similar to a 401k plan. The big difference is you can just open it up on your own, like, you don't need to go through your employer. And also the contribution limits tend to be a little bit lower than they would be for a 401k.

The other term is Roth, and Roth can be attached to an IRA, be attached to a 401k plan, and that term just refers to the tax treatment of the money that you're putting into this plan. So, with a traditional version of a 401k or an IRA, the money you put into the plan you can take a tax deduction on that right away, but you end up paying taxes on all the money you take out years down the road. With a Roth, you pay taxes on all that money so you get no tax break upfront, but when you start withdrawing that money out years down the road, you pay no taxes on it. No matter how much it's grown to be, you get to take that out and then pay nothing in taxes. Which is really great, especially when you're starting at a really young age.

Now the thing to keep in mind, though, with all of this is that in order to put money into a Roth IRA, your kid needs to have some type of earned taxable income, meaning they're getting a 1099 or a W2 form. Which does rule out a lot of kids, right, because you have to be of a certain age to get a job where they're actually going to pay you and give you a tax form. So, this isn't great for your smaller kids, but for your older kids who may pick up a summer job here or there, this is a great way to get them started early. Because one of the things I hear most often from people is that they wish they would have started earlier, and if you could help your kids start investing now for retirement just think about how much easier it's going to be for them down the road, when they start saving for retirement, they'll have such a huge head start and make things so much easier for them as they get older.