The Benefits of Starting a Roth IRA for Your Child

In 2019, Forbes estimated the net worth of Peter Thiel, co-founder of PayPal, at $2.3 billion. What Forbes did not report is that, apart from the $2.3 billion, Thiel had more than $5 billion in his retirement account. Notably, the retirement account had substantial growth that was tax-free, as it was a Roth IRA. This shows the potential that Roth IRAs hold for long-term tax-free growth.

One of the key advantages of a Roth IRA is its long-term benefits. When you open a Roth IRA and contribute to it, your money will never be taxed, regardless of how much it grows. This tax-free growth can lead to significant gains from successful investments, all of which will be tax-free when left in the account until age 59.5.

Opening a Roth IRA for a child using their earned income is a powerful way to create generational financial stability. The Roth IRA will be funded with after-tax dollars, meaning that withdrawals during retirement won’t be taxed. By starting a Roth IRA early, you can take full advantage of the IRS limits on annual contributions, maximizing your tax-saving potential over time. The power of compounding interest also makes starting a Roth IRA early advantageous. By allowing contributions to grow over a longer period, you can potentially see significant growth in the account. Moreover, a self-directed Roth IRA allows you to invest in a wide range of assets, from stocks and private companies to real estate and LLCs, giving you the opportunity to invest in your own business as well.

It’s important to note that Roth IRAs offer flexibility, allowing the account owner to make early withdrawals without tax or penalties after at least five years of account opening, as long as you only withdraw the contributed amount and keep the earnings portion intact. This means you have the flexibility to access the funds if needed, without penalties, before the age of 59.5. In summary, a Roth IRA for your child offers both short-term and long-term benefits, providing a tax-efficient way to save for their future. By taking advantage of the tax-free growth, the potential for compounding interest, and flexibility in investment options, you can lay a solid financial foundation for your child’s future.”

^[1] “Lord of Roths: How Tech Mogul Peter Thiel Turned a Retirement Account for the Middle Class Into a $5 Billion Tax-Free Piggy Bank” (https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank)