Opening a custodial IRA account for your kids or a family member that is a minor is a great way to show them the importance of saving for retirement at an early age. When I was growing up, even all the way through high school I had no idea about investing. I didn’t know what a FICO score was and I certainly never heard the terms roth or traditional IRA. Teaching a child about investing and saving early on is one of the best steps that you can take to help them secure a good financial future.
When opening a custodial IRA there are some things that you need to keep in mind:
- Custodial IRA’s are for minors who have earned income. So the second your child has a legitimate job where they are earning income, take them to a bank, Mutual Fund company or a brokerage firm and open an account.
- You can only open an account as either a Roth IRA or Traditional IRA
- The account is managed by a parent or guardian; also know as the IRA custodian. Once any money has been deposited into the IRA the IRA custodians cannot touch the money. There are no take backs and that money is forever theirs until it is turned over to them once they come of age, which is typically 18 to 21, depending on the state that you are in.
As you and the child are investing the money into the account, take the time to explain to them why they are doing this and how it will benefit them. Of course they might not fully understand and there may be times where they have a hard time giving up their money, encourage them to continue the savings. While this money is typically started for retirement, they can also use this money later on to help pay their way through college. So if the retirement angle isn’t an ideal explanation or something they are terribly concerned about, use college as a way of showing them how important it is to save. The money invested is tax deferred and compounding interest is their friend.
As with most life lessons, kids may not get it now, but they will thank you later for starting their future off on the right foot!