Do You Know What Your Biggest Asset Is?

It's Not Money.

What is the biggest asset we all have? Hint, hint..….it’s not money..….

It’s TIME!

As parents, we want to provide the best financial future for our children. One often overlooked strategy is opening a retirement account for your minor child, giving them the gift of TIME.

In particular, a custodial Roth IRA can be a powerful wealth-building tool, especially for parents who are entrepreneurs and hire their children as an employee.

As an entrepreneur hiring your children, you have a unique opportunity to not only impart valuable work experience but also to lay the foundation for their financial success through a custodial Roth IRA.

A Roth IRA (Individual Retirement Account) is a tax-advantaged retirement savings account that allows individuals to contribute after-tax dollars.

A custodial Roth IRA is a specialized retirement account that combines the benefits of a Roth IRA with the advantage of an adult being custodial, offering a powerful tool for long-term wealth creation.

Why Choose a Custodial Roth IRA?

Roth IRAs are an ideal retirement tool for kids due to their unique advantages.

1. There is no age limit: Even babies can contribute to a Roth IRA. It’s about earned income, not age.

For example, if your company hires your child as a model to promote your product or service, your child is earning an income.

Their income, up to $7000.00 (the yearly contribution limit in 2024) or the maximum amount they earned in the year, whichever is less, can be contributed to their Roth IRA.

So, if your child earned $2000 for the year, they could contribute $2000.00 to their Roth IRA. If they earned $8000.00 in 2024, they could only contribute $7000.00, which is the 2024 yearly limit.

2. Unlike traditional IRAs, contributions to a custodial Roth IRA can be withdrawn tax and penalty-free at any time.

This flexibility is especially important for children, who may have different financial needs and goals as they grow up. A Roth IRA is generally used for retirement, however, the contributed amount can be withdrawn at any time and used for anything.

3. Contributions made by children have decades to grow tax-free, maximizing the potential for long-term wealth accumulation.

Geek out with me for a minute…. Let’s look at what a retirement account could look like if you started contributing to a Roth IRA for your child at five years old.

Let’s assume that the maximum contribution was made every year:

  • Yearly maximum contribution: $7,000 (as of 2024).

  • Annual rate of return: 7%. (The typical annual rate of return is between 7% and 10%.)

Yearly Contributions and Growth:

  1. Age 5-18 (Contributions made by Custodian):

    • Contributions: $7,000 per year.

    • Total contributions over 14 years: $7,000 * 14 = $98,000.

  2. Age 19-65 (Contributions made by Account Holder after transfer of control):

    • Total years of contributions: 46 years.

    • Total contributions over 46 years: $7,000 * 46 = $322,000.

Exponential Growth Calculation:

Age 18 (End of Custodial Period):

  • Total contributions at age 18: $98,000.

  • Potential future value at age 18: $98,000 \times (1 + 0.07)^{18} ≈ $208,428.84.

 Age 65 (Retirement):

  • Total contributions at age 65: $98,000 (contributions made by custodian) + $322,000 (contributions made by account holder) = $420,000.

  • Potential future value at age 65: $420,000 \times (1 + 0.07)^{46} ≈ $2,900,107.62.

Opening a Custodial Roth IRA:

To open a custodial Roth IRA, a parent or another adult must act as the custodian.

When choosing a provider, consider factors such as fund fees and management fees to find the best fit for your needs. The account setup process is simple and can be completed online in just 15 minutes. You'll need to provide personal information, such as Social Security numbers and birthdates for both you and your child.

Benefits of a Custodial Roth IRA for Minors:

1. Flexibility of Withdrawals: Unlike other retirement accounts, contributions to a custodial Roth IRA can be withdrawn at any time without tax penalties. This allows children to access their funds for various purposes, from smaller expenses to major life events.

2. Time for Growth: The power of compound interest is undeniable. By starting early, children have a significant advantage in terms of investment growth. With decades to accumulate wealth, the potential for long-term financial security is substantial.

3. Investing vs. Saving: While savings accounts are commonly used for children, a custodial Roth IRA offers the opportunity for children to learn about investing. By allowing children to choose their investments, they can experience the potential for greater growth over time.

 4. Tax Advantages: The tax benefits of a Roth IRA are particularly advantageous for children. With their low tax rates and the ability to avoid taxes on contributions, children can maximize their earnings and build a tax-free nest egg for retirement.

5. Beyond Retirement: A custodial Roth IRA is not limited to retirement savings. Contributions can be used for various purposes, such as buying a first home or funding qualified education expenses. These options provide additional financial flexibility for your child's future.

Best Custodial Roth IRAs:

Several online brokers offer custodial Roth IRAs, making it easy to set up and manage the account.

I suggest talking to the financial experts at Melanin Money for financial advice. George and Da-zha are excellent at what they do and will get you on your way to generational wealth.

It’s not too early and it’s never too late to start.

For general informational purposes only. I am not a financial expert. Speak to a Certified Financial Planner for financial advice concerning your specific financial projections.