When your child adds cash to their Roth IRA account, they do not get any tax breaks — which would not be valuable to them, in any case, as children’s tax rates are typically very low. But, there are valuable tax advantages at the back.

Your child will be able to withdraw their contributions and earnings 100% tax-free once they are over age 59½ (based on current rules). The investment and the growth, interest and dividends on the assets will be exempted from Uncle Sam’s clutches. Over time you can build up a large amount of cash.

Your child may need to access their investment account earlier if the account has been in existence for at least five consecutive years.

Roth IRA contributions can grow tax-free for children over many decades. Compounded growth exponentially increases the account’s worth. All profits earned are added back to your principal, then reinvested into the stock market in order to increase account growth.

Famous polymath, scientist, diplomat, and inventor Benjamin Franklin praised compounding throughout his lifetime. Benjamin Franklin commented: “Money makes money. Money makes money. Franklin’s definitions of compounding are spot-on. This is why it’s important to save as much money as possible at an early age.

Compounding can seem complicated, particularly if you don’t have spreadsheet software. However, you can create a formula in your head to perform these calculations. To figure how long it takes to double your money, the Rule of 72 can be a useful tool.

Divide 72 by the interest rate to determine how long it takes for your investment to double. For example, if your child invests in the S&P 500 Index and it returns 10% over time, they will double their investment value in the portfolio in 7.2 years (72 divided by 10).

The math was even admired by Albert Einstein. The story goes that compound interest was Einstein’s most important invention. His greatest miracle was saving money, and then seeing it grow.

You can open a Roth IRA to help your child.

Schwab, Fidelity, E*Trade and many other firms offer custodial Roth IRA accounts for your kids. You will be the custodian of the account and make all investments decisions for your child until he or she reaches the age of majority.

The age of majority in most states is 18. However, some other states have higher ages such as 19 and 21. Your state will determine when your son/daughter reaches age majority. The Roth IRA then transfers solely to them.

Roth IRAs are available to any child, regardless of age. Your child’s work should be appropriate for their age and pay “reasonable wages.” It is easy to determine what earned income is when you work for a company that issues 1099s at the end.

This can make it difficult to see the difference when your child does work for you. For example, if they are babysitting or lawn-mowing, or establishing their own business such as a lemonade shop. It is important to have accurate records of work and bills.

Parental contributions can be matched to help your child increase their Roth IRA savings.

If your child earns $2,000 in summer sales at an ice cream shop and then saves 50% of that money to their Roth IRA for retirement, you can increase the amount available to parents to add $1,000 to their investment account. Only problem is that you cannot contribute more than your child’s annual earned income. For 2022, the maximum IRA contributions are $6,000

Your child can start financial habits early by creating a retirement fund that is well-funded. Research shows that children who are taught about money early in life will benefit financially over the long term.

It is not possible to rely solely on local schools for good money-skills instruction. Few states require personal finance classes. Even fewer offer qualified instructors.

You can save into a Roth IRA custodial with your child. This will ensure they are financially secure. It also helps them to have a true appreciation for money.

The bottom line is that Roth IRAs are ideal for kids, because children have decades for their contributions to grow tax-free.

— By Stacy Francis, president and CEO of Francis Financial