Saving
FTX.us Review – How Does This Crytpo Exchange Stack Up?
What Is the Average Monthly Grocery Bill for One Person?
Everyone buys groceries, but how much should an individual or household spend on food each month? Food is the third largest expenditure for Americans, and for those looking to cut costs, it can be a place where reductions are possible with some planning and budgeting. In 2020, Americans spent an average of 8.6% of their […]
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Emergency Funds: Why, Where, and How Much
Checking Accounts Vs. Money Market Accounts: Which Should You Choose? – Money Under 30
Managing your budget can be stressful, especially if you have an unexpected emergency pop up. Fortunately, there’s a way you can prepare for unexpected financial emergencies. By building up a savings buffer—called an emergency fund—you can be prepared to pay for unexpected emergencies without having to turn to credit card debt, family loans, or other borrowing options … [Read more…]
The Best Way for Kids to Save Isn’t in a Boring Bank Account
Most kids are encouraged by their parents to save their money from their paper route or part-time job by throwing it into a bank savings account. While any kind of saving is better than nothing, there may be a way to do it where your kids can get tax benefits as well as a potentially better rate of return.
- SEE MORE Parenting Lessons I’m Learning as My Son Learns About Money
A Roth IRA, if properly invested, will likely appreciate in value far more than money sitting in the bank — and could do it with tax-free growth. And the day will come when your child will be very grateful for the parent with the wisdom to have them do this. Later the Roth IRA will be available to help pay for college, and up to $10,000 of it can be put toward your child’s first home, all without early withdrawal penalties.
And if the young person can’t resist pulling some funds out for that bicycle, the good news is that the original amount invested in a Roth IRA can always be withdrawn tax and penalty free. Also, for the child with the foresight to use some of their Roth IRA for retirement, withdrawals after 59½ will be completely tax free.
Age and income requirements
As long as a child has earned income, they can contribute up to $6,000 per year in a Roth IRA at any age. Someone else can also fund the Roth IRA for the child for up to $6,000 a year as long as the child has earned income equal to the amount contributed on their behalf.
If the child is legally a minor, which means in most states under 18 years of age, they will need to open a custodial Roth IRA where the child is the account owner with an adult, usually a parent, serving as the custodian. Contributions are reported to the IRS under the minor’s Social Security number, but the custodian is the individual authorized to act on the account.
Are there any disadvantages or pitfalls to watch out for?
While the original contributions can always be withdrawn tax-free, any growth in the investments in a Roth IRA if withdrawn before age 59½, would be subject to taxes as well as a 10% penalty. But keep in mind the IRS does make an exception if the funds are used for college or up to a $10,000 amount for a first-time home buyer, both which can prove to be a nice benefit for young people. In these cases, the funds can be withdrawn without a 10% penalty, although the growth would still be subject to taxes.
- SEE MORE OK Boomer vs. Avocado Toast: How to Talk Money Across Generations
Something else to be aware of is how to document income if the minor is not employed with a company and is not issued a W-2, for example if they mow lawns or shovel snow or babysit. In this case the custodian should document that the child received earned income that was reasonable. For example, a parent should not pay a child $1,000 for shoveling the sidewalk one time.
What about market fluctuation?
For a younger child, don’t get overly concerned about putting the Roth IRA money in stocks or stock mutual funds, which historically have made the most money over time compared to putting it in things like bank CDs. The best safety against market fluctuation is time, and for a younger child, statistically speaking, they will have a lot more time to average out the fluctuation in the market and likely end up with some good average returns.
- SEE MORE Hey, Parents: Caution Is Critical with UTMA Custodial Accounts
24 Companies That Pay Off Student Loan Debt (as an Employee Job Perk)
9 Best Online Checking Accounts: Mobile Banking That Works
Bank digitally, skip maintenance fees, and even earn some cash rewards and interest yields with our top online checking accounts.Bank digitally, skip maintenance fees, and even earn some cash rewards and interest yields with our top online checking accounts.
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FNBO Direct Review: My Experience Using FNBO
8 Features Every 20-Something Needs In A Bank Account
Managing money in your 20s is complicated and ever-changing. Look for these bank account features to set a solid foundation for your financial future.Managing money in your 20s is complicated and ever-changing. Look for these bank account features to set a solid foundation for your financial future.
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