Roth IRAs for Kids:
Why Kids Have Substantial Investing Advantages
By Hannah McMunn
Kids have substantial investing advantages, especially if their investments are made in Roth IRAs. For more information on the benefits of Roth IRAs for Kids, please see: IRAKids.com The advantages that kids have as investors are discussed below:
First: most kids are fortunate to have parents or guardians that take care of the kids’ needs. Those kids do not have to pay for housing, utilities, transportation, food, clothing, education, health, life and property insurance, or other necessities of contemporary life. For the most part every dollar a kid earns is discretionary money. Kids can focus on “wants”, which, as they grow older, can become quite significant. But if kids can suppress their “wants”, the money they earn can go into investments, rather than otther basic needs. (See also ”Wants vs. Needs.”)
Second, earnings less than $5700 are not subject to income tax, and most kids will earn less than that in a calendar year. Parents/guardians can still claim kids as dependents on their income tax returns if the kids are under 19 years of age, live at home, and do not pay more than half of their support. The money kids save on income taxes can go into investments instead. (See also: ”Paying Taxes.”)
Third, starting to invest early, kids have a much longer time to benefit from compound interest, a major key to accumulating financial wealth. If past market conditions continue into the future, kids that are 8-9 could see their investments double as many as EIGHT times, and kids 16-17 could see them double seven times -- before they retire. Those last few “doublings” will provide tremendous growth – growth adults will not experience because they started investing later in life. By investing in Roths, all that growth is tax free. (See also: ”Compound Interest Growth.”)
Fourth, starting to invest early, especially in Roths, gives kids a vital head start in financial literacy education, helping to make them better investors at a much earlier age – and establishing early a life-long pattern of saving and investing.
Fifth, kids can be more aggressive investors -- taking greater risks in quest of larger gains -- because they have more time to recover from investment mistakes. Those mistakes will contribute immensely to their financial literacy education. Better to make such mistakes early with a small amount of money than later in life with large sums.
Sixth, many financial institutions offer kids preferential benefits, such as higher interest on savings accounts. Once kids become 19 years of age, those special benefits generally expire. Policies vary. (See also: ”Savings Accounts and Other Financia Services for Kids.”)
These are some of the major benefits kids have as investors. Kids need to take advantage of them and get a huge head start to financial security and wellbeing.
*Hannah was 17 when this article was written during the fall of 2011.
© 2011, IRAKids.com. All rights reserved.
Why Kids Have Substantial Investing Advantages , by Hannah McMunn, describes six benefits kids have as investors. For the most part, their needs are paid for them by parents or guardians, freeing most of their earnings for investment purposes. Most kids will earn too little in a given year to have to pay income tax. Their investments have a much longer time to benefit from compound interest, a keey to financial wealth. Starting early, they will have a head start in financial literacy education, and establish early a life-long pattern of saving and investing. They can be more aggressive investors, because they have more time to recover from investment mistakes. And many financial institutions offer preferential benefits to kids under 19 years of age. Kids need to take advantages of these investing advantages. (This article is provided courtesy of IRAKids.com.)
This article may be reused freely for educational purposes and may even be reprinted in other print publications (e.g., credit union newsletters) to encourage kids to save and invest. This articles may not be sold or included in a publication that is to be sold. This article may not be loaded on other websites, but the abstract may be used and/or the articles may be summarized on other websites. In all cases, the author and the IRAKids.com website must be credited with authorship, and links should be provided back to the IRAKids.com website. For other uses of this article, please contact IRAKids.com.
For additional articles on Roth IRAs for Kids – and related topics, which may be reused according to the “Guidelines” noted above, please see Articles by Hannah on Roth IRAs -- for Free Reuse Elsewhere.