How to Start an IRA for Your Kids

Let’s be real—retirement is probably the last thing on your kid’s mind. They’re likely still asking you for a new video game, not planning for life after work. But imagine this: your 18-year-old is already ahead of the game with an IRA! Yep, an IRA for your kids could be the ultimate power move in setting them up for financial success. Forget the new bike or helping them with college—how about the gift of never having to work a double shift in their 70s?

First Things First: Can a Kid Even Have an IRA?

Yes, your kid can absolutely have an IRA, but there’s a catch. They need to have earned income. This doesn’t mean they must pull 9-5 shifts at the local pizza shop. If they’re babysitting, mowing lawns, or working as a part-time TikTok influencer (hey, it’s a thing), that counts. As long as they’re legally earning money, they can open an IRA.

And don’t worry, their IRA won’t affect your IRA. Your kid’s retirement fund is entirely separate from yours. You won’t be fighting over who gets more in tax deductions come April.

The Types of IRAs for Your Kids: Traditional vs. Roth IRA

There are two main types of IRAs to consider for your child: Traditional and Roth. Here’s the scoop:

• Traditional IRA: Your kid gets a tax deduction now, but they’ll pay taxes on withdrawals when they retire. This is better if they expect to be in a lower tax bracket when they’re older.
• Roth IRA: No tax deductions upfront, but withdrawals in retirement are tax-free. Given that your kid is likely earning very little now (thank you, summer job), a Roth IRA makes more sense. Pay taxes now while the income is low, and enjoy tax-free income later when they’re chillin’ on a beach at 65 (or possibly 45).

The Roth IRA is typically the better choice for a kid who’s raking in small amounts of money. Plus, who doesn’t love tax-free retirement income?

How Much Can Your Kid Contribute?

The rules are simple: your child can contribute up to $7,000 per year (as of 2024) or the amount of their earned income—whichever is less. So, if your teen made $2,000 selling lemonade and lawn care this summer, they can contribute up to $2,000 to their IRA.

Here’s where things get fun: you can help match their contributions. They don’t have to contribute their entire paycheck, but you can match what they make up to the limit. For example, if they make $1,500 at their part-time gig, they could contribute $750, and you can throw in the remaining $750 to get them to their $1,500 max. It’s like 401(k) matching, but on a family level—because who else will look out for their future if not their parents?

The Gift of Retirement Over the Gift of Tuition

We all love the idea of helping our kids with college, but have you considered how valuable an early retirement fund could be? Instead of throwing thousands toward tuition (which they can always work their way through or get scholarships for), why not set them up with an IRA?

Here’s the thing: retirement will happen for your kids. College? Maybe, maybe not. But retirement is inevitable, and the earlier they start saving, the more time compound interest has to do its magic. By starting them off young, you’re giving them the gift of financial freedom. It’s the ultimate “long game” move.

And hey, if you want to help with both college and retirement, there’s always the option of splitting contributions between a 529 plan and an IRA for your kids. But if you have to choose, that IRA could ensure they don’t end up working at the grocery store at 70.

Different Uses for an IRA (Beyond Just Retirement)

Starting an IRA for your kids isn’t just about retirement. In fact, there are several ways an IRA can be useful long before they hit retirement age:

1. First-Time Home Purchase: Your child can withdraw up to $10,000 from an IRA to buy their first home. So, by starting them early, you’re also potentially giving them a down payment on their future house.
2. Education Expenses: If your kid decides college is their thing, they can tap into their IRA without penalties (though taxes apply) to pay for qualified higher education expenses.
3. Emergency Fund: We don’t like to think about bad stuff happening, but IRAs allow penalty-free withdrawals for certain hardships, like big medical expenses. It’s a solid safety net in an emergency—much better than a credit card.

With these options, you’re giving your child financial flexibility and security. Honestly, what better gift can you give than peace of mind?

Starting the IRA Journey (And Making It Fun)

You might be wondering how to get your kid interested in this whole “saving for the future” thing. I mean, it’s hard enough to convince them to clean their room, let alone invest for retirement. But here’s where you can get creative:

• Show Them the Power of Compound Interest: This is the magic sauce. Take a $500 contribution at age 15, let it grow at an average of 7% annually, and that small sum can turn into thousands by the time they’re 60. You can even use online calculators to show them how their contributions grow.
• Set Goals Together: Turn it into a game. Maybe the goal is for them to save $1,000 by the end of the year, and you’ll match it. Or set benchmarks for big milestones like their first car or home.
• Celebrate Contributions: When your kid puts their babysitting money into their IRA, make a big deal out of it. Celebrate with pizza night, or give them a little reward. It reinforces that saving is something worth celebrating!

IRA for Your Kids: Long-Term Benefits

In 50 years, when your now-grown child is sitting on a beach, sipping exotic drinks, and enjoying an early retirement, they’ll think back to this IRA you helped them start and whisper, “Thanks, Mom/Dad, for looking out for me.” Or maybe they’ll just send you a thank-you card, but either way, the benefits are undeniable.

Starting an IRA for your kids is one of the smartest financial moves you can make. It sets them up for a life of security, teaches them about long-term financial planning, and gives them a head start on retirement that most of us wish we had when we were younger. So go ahead, set them up with an IRA—and then sit back and watch compound interest work its magic. They may not appreciate it now, but one day, they definitely will.

When it comes to investment accounts, I always prefer Vanguard.

Further Reading

• The Kids Roth IRA Handbook by Tracy Foote
• Finance 101 for Kids by Walter Andal
• Investing for Kids by Dylin Redling & Allison Tom