Author Archives: FinanciaLady

How Custodial Roth IRAs Helps Secure Your Child’s Financial Future

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What Are Custodial Roth IRAs?

Custodial Roth IRAs are similar to regular Roth IRAs but with a few differences. First of all, let’s explore Roth IRAs here. Additionally, an adult, usually a parent or guardian, opens a custodial Roth IRA for a child. Moreover, they will also manage the account until the child becomes an adult, typically around 18 years old. The purpose of a custodial Roth IRA is to let parents or guardians save for their child’s retirement from an early age. Importantly, by starting contributions early, the child has the potential to grow their savings with compound interest over time.

During the time that the account is held under custodial status, the custodian is responsible for managing the account and making investment decisions on behalf of the child. This arrangement allows the custodian to guide the investment strategy and ensure that the account is being properly managed.

Once the Child Becomes an Adult

Once the child becomes an adult, however, in addition, they take over the custodial Roth IRA. At this point, the custodian’s role then shifts to furthermore assisting the child in transferring the custodial IRA into their own name as a regular Roth IRA. By doing so, this grants the child with full control of the account, thereby enabling them to continue saving for retirement independently.

Additionally, it’s important to understand that even though the custodian manages the account while the child is under 18, the money in the custodial Roth IRA actually belongs to the child. This means that the child owns the funds and they can only be used for retirement savings. As the child grows up and learns more about finances, the custodial Roth IRA can be a great way to teach them about investing and the importance of planning for the future.

How do we start a Custodial Roth IRA

In order for a child to be eligible for a Custodial Roth IRA account, they must have earned income. They cannot contribute more than their gross income in a year. However, as long as they are paying taxes on the money, they can contribute it to this account.

One way your child can have earned income is by working for your own business. This arrangement can provide them with the opportunity to earn taxed income. They can contribute this income to the Custodial Roth IRA account. By doing so, they can start building their retirement savings at a young age. This allows them to potentially benefit from the power of compounding.

Alternatively, when your child starts their first job, they can also contribute a portion of their earned income to the account. This cultivates a sense of responsibility and financial independence. As well as allow them to take advantage of the potential tax advantages offered by a Roth IRA.

Contribution Limits

Custodial Roth IRA accounts do have the same contribution limits as normal Roth IRA accounts. In 2023, the contribution limit is $6,500. Additionally, like Roth IRA accounts, you will open them with a brokerage of your choice, such as Fidelity, Vanguard, Charles Schwab, or many others.

By proactively opening a Custodial Roth IRA account for your child, you not only are taking the first step towards securing their future, but also are helping them understand the importance of long-term financial planning. By setting them on a path to prosperity, furthermore, through consistent contributions and wise investment decisions, they can take advantage of early retirement savings benefits.

It’s a good idea to talk to a financial advisor or tax expert to make sure your child qualifies for a Custodial Roth IRA and to make the most of the benefits it offers. They can help you make informed decisions that align with your child’s financial goals and needs.

Sources:

Freitas, T. (2023, September 13). Custodial Roth IRA: How and why to start a Roth IRA for kids. Bankrate. https://www.bankrate.com/retirement/custodial-roth-ira-starting-ira-for-your-child/#:~:text=Custodial%20Roth%20IRAs%20are%20funded,it%20(unlike%20traditional%20IRAs).

O’Shea, A., & Taube, S. (2023, November 2). What is a custodial Roth Ira?. NerdWallet. https://www.nerdwallet.com/article/investing/why-your-kid-needs-a-roth-ira

Discover the Best Retirement Accounts to Maximize Your Savings

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“Now, you might be wondering, how should I set myself up for retirement?'”

First, you need to learn the basics of the available types of retirement accounts. In the United States, there are two main types of retirement accounts: Individual Retirement Account (IRA) and 401K. Most people know 401K. It is usually included as part of the employment package at any full-time job in the USA.

You can start making penalty-free withdrawals from all retirement accounts at 59 and a half years old. But, there are exceptions to withdrawal before that without penalties, like for disability or death. Additionally, you must have held the account for 5 years at the point of withdrawal. Set up the account by 54 and a half years old. Then, you will not face any penalties by 59 and a half years old.

IRAs, what are they?

Adult individuals have the ability to set up individual retirement accounts (IRAs). Here are some key points to know:

  • The maximum contribution limit for all IRA accounts in 2023 is $6,500 per year.
  • It is possible for one individual to hold multiple open IRA accounts at the same time.
  • There are two subtypes of IRAs: the Roth IRA and the Traditional IRA.

People who believe that their future income will exceed their current income level tend to be attracted to Roth IRAs. This account emphasizes the benefits of tax-free withdrawals and enables individuals to make withdrawals without any age restrictions.

Here are some key points about contributing to a Roth IRA:

  • Contributions can be made to this account at any time.
  • You can also make contributions for a single year from January of that year to April of the following year.
  • To qualify for contributions to this account, your income must not exceed $153,000 per year. This applies if you file as a single individual. It must not exceed $228,000 per year if you file jointly.
  • You can contribute until you reach that income threshold. Any growth in the account until retirement will be tax-free when you withdraw funds.

Roth IRAs provide several advantages for individuals who anticipate an increase in their future income. Understanding the eligibility requirements and contribution rules is crucial to maximizing the benefits of this investment option.

Individuals who believe their income in retirement will be lower than their current income typically choose Traditional IRAs. This account emphasizes the following features:

  1. Tax Benefits: Contributions to Traditional IRAs can adjust gross income, allowing individuals to potentially lower their tax liability. Additionally, the money in a Traditional IRA can earn both pre-tax and post-tax returns.
  2. Tax Deferral: Traditional IRAs offer tax deferral, which means that the funds will be taxed at the individual’s current income rate upon withdrawal, rather than the income rate at the time of contribution.
  3. Required Distributions: Unlike Roth IRAs, individuals must fully distribute the funds from their Traditional IRA by the age of 73.
  4. Flexible Contributions: Like the Roth equivalent, individuals can contribute to a Traditional IRA at any time. Furthermore, contributions for a single year can be made from January of that year to April of the following year.

By understanding these features, individuals can make informed decisions when planning for their retirement.

401Ks, what are they?

401Ks are retirement accounts that employers sponsor for individuals. As of 2023, individuals can contribute a maximum of $22,500 per year to their 401K accounts. Saving for retirement becomes easier for individuals as these accounts deduct funds directly from their paychecks.

Employers typically determine the amount that each paycheck will contribute to these accounts, usually as a percentage. In addition, many employers also match contributions up to a certain limit. This means that employees receive free money, so I suggest contributing at least up to that point if the employer offers this matching program.

Similar to IRAs, 401K accounts offer both Roth and Traditional options. The primary difference lies in how individuals fund the accounts. In Roth 401Ks, individuals contribute already-taxed money, allowing for tax-free withdrawals. Conversely, in Traditional 401Ks, individuals fund the accounts with pre-tax money, resulting in taxed withdrawals based on their current income level at the time of withdrawal.

To Conclude

No matter which account(s) you choose, it remains crucial to save for retirement! Unless you want to work until you pass away, you must set up savings to retire and live without the need to work.

After choosing your account, remember to invest! To learn some information, check out this article.