|Advantages and Disadvantages of Roth IRAs for Kids (Children/Minors)|
Advantages of Roth IRAs
Money invested in a Roth IRA grows tax free (with exceptions noted under Disadvantages) and distributions after age 59 ½ (and after a “seasoning” period of 5 years) will be tax free.
The principal invested in the Roth IRA can be withdrawn at any time for any purpose without penalty or taxes.
Money earned by investments can be withdrawn early for qualified purposes, e.g., $10,000 to purchase a first home (specific rules apply).
Unlike a traditional IRA, if you do not need the money, you do not have to begin withdrawals at a specified age, and you can continue to let it grow, for the benefit of heirs.
In estates large enough to pay estate taxes, Roth IRAs provide specific benefits.
For more information on these and other advantages, please consult the sources listed below, other sources on the Internet, and your financial advisor.
Disadvantages of Roth IRAs
The funds you invest in your Roth IRA are after-tax money, and may be subject to Federal income tax, state income tax (if you live in a state with an income tax), self-employment tax and/or Social Security tax (under some circumstances).
In other words, contributions to Roth IRAs do not reduce a taxpayer's adjusted gross income on which they will have to pay taxes.
If you have a high income (not likely for a kid) – your eligibility to contribute to a Roth IRA phases out.
You can contribute a maximum of $5000 in 2010 and 2011 (while persons over 50 can invest $6000).
Some foreign countries will tax earnings from their countries – such as stock dividends, and these taxes will have to be paid even for equities held in a Roth IRA.
When you retire, you may move to a state that does NOT have an income tax. Thus the fact that your withdrawals are tax free anyway provides no advantage over having a regular IRA – but then you still would be subject to Federal income tax on those withdrawals.
If you are in a high income tax bracket now (not likely for a kid), you may pay a higher tax now than after you retire.
You may not live to receive the benefits of a Roth IRA.
Tax laws may change.
Special rules apply to Canadian Roth holders with earned income in Canada.
For more information on these and other disadvantages, please consult the sources listed below, other sources on the Internet, and your financial advisor.
Please see More About Roth IRAs for additional resources on this subject.
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