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Planning for a child’s financial future is an important part of parenthood. Leveraging the right tools for capital growth and appreciation can help to create a nest egg for college, homeownership and long-term financial stability.
One of the most common savings tools parents can use is the custodial Roth individual retirement account, better known as a custodial Roth IRA, which is designed to grow money tax free. By thinking ahead, parents can help their children understand and appreciate personal finance fundamentals and set the next generation up for long-term savings success.
The Roth IRA is one of the most popular ways to save for retirement. You can withdraw the money you’ve invested without tax penalty at any point, and once you’re 59 ½ years old, assuming you’ve had the account for at least five years, you can withdraw the earnings tax free. And another bonus of the Roth IRA is that there are no required minimum distributions.
The custodial Roth IRA works the same way, but the parent remains the owner of the account until the child is 18 or 21 years old, depending on which age your state defines as the beginning of adulthood. Once the child reaches adult age, the account converts to a regular IRA, and they are in charge of managing the funds.
Although a child of any age (there’s no minimum age) can contribute to a custodial Roth IRA, there is an eligibility requirement: The child must earn income—and pay taxes on the money.
Of course, the older the child, the more likely they’ll be ready for income-earning opportunities, but there are instances in which very young children, even infants, can make money via modeling or endorsements.
So, if your child is into babysitting, dog walking, mowing lawns, washing windows, or musical gigs, or has a job where they lifeguard, tutor, or work in retail or at a fast-food restaurant, they can contribute to the IRA and take an active role in their own retirement planning.
Children can contribute up to a certain amount per year to a custodial Roth IRA (the limit in 2023 was $6,500). If they earn more than the limit, they can invest that additional amount in a certificate of deposit, savings account or another financial tool. (The IRA contribution limit may change from year to year, so check with a financial advisor.)
Because Roth IRAs are designed to be long-term investments, it’s best to let the money grow until you’ve reached retirement age. However, because the money invested in the Roth IRA has already been taxed (remember, the investment is from after-tax income), you can withdraw your contributions at any time without a fee or penalty.
If you want to withdraw the account’s earnings (the amount of money earned from interest or dividends), you’ll have to wait until you’re 59½ years old and have had the account open for five years or more. At that time, you can enjoy penalty-free withdrawals.
While Roth IRAs are preferred for their after-tax benefits, traditional IRAs are preferred for pre-tax advantages. So, while your contributions to a Roth IRA are made after paying taxes on the money you‘re investing, the opposite is true with a traditional IRA: You’re taxed on your contributions when you withdraw the money.
There are other investment options parents can use to help save for their children’s future, including:
When you think about saving for the future, one of the most important variables to consider is growth potential, which means asking, “How much can I grow my money?” Each type of investment tool has its own advantages, so finding the one that aligns with your financial goals is key to longevity and success.
AAA Banking advisors are available to help you plan for your family’s financial future with a custodial IRA, savings account, money market account or CD. And to streamline the process, AAA makes it a snap to apply for, set up and manage your accounts online.
With financial tools like a custodial Roth IRA, you can help your children set the foundation for smart money management that will guide them throughout their lives
Get financially fit
Whether you’re saving for yourself or teaching the basics to your children, AAA is here to help you grow your investments.
This information is being provided for general informational purposes only. The Auto Club Group does not assume any liability in connection with providing this information.
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We may change APRs, fees, and other Account terms in the future based on your experience with ACG Card Services and its affiliates as provided under the Cardmember Agreement and applicable law.
1Cash back can be redeemed in the form of a statement credit or ACH deposit ($25 cash back minimum redemption). Cash back is not earned on business related transactions or activities. You may not redeem cash back, and you will immediately lose all of your cash back, if your account is closed to future transactions (including, but not limited to, due to Program misuse, failure to pay, bankruptcy, or death). Cash back will expire at 11:00 p.m. Central Time on the last day of the calendar quarter that is five (5) years from the date on which they are earned. Account must be open and in good standing to earn and redeem rewards and benefits. Upon approval, please refer to your Cardmember Agreement for additional information. Cash back is earned on eligible net purchases. Net purchases are purchases minus credits and returns. Not all transactions are eligible to earn cash back, such as Advances, Balance Transfers, and Convenience Checks and other advance transactions as defined in the Cardmember Agreement, as well as interest charges and fees do not qualify. U.S. Bank cannot control how merchants classify their business or transactions and reserves the right to determine which Purchases will qualify in which category. Earn 2% per dollar for qualifying net purchases made with the card through any participating AAA Club when AAA is the merchant of record, on qualifying net insurance purchases (MCC = 6300) and at eligible retail travel merchants. AAA Clubs located in Northern California, Nevada and Utah are not participating AAA Clubs and purchases made at those clubs will not qualify for 2%. Earn 4% per dollar for qualifying net purchases on AAA purchases, travel and insurance for your first 6 months up to $6,000. After that, earn cash back in the standard 2% category. Foreign Transaction Fee: None.
2 Benefits are subject to terms, conditions, and limitations on the amount of coverage. Travel and Emergency Assistance Services help in coordinating medical, legal and travel services while away from home. Rental Collision Damage Waiver coverage and peace of mind for damage due to collision or theft of most rental cars. Certain terms and conditions apply. Please refer to your Visa Guide to Benefits for details
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*Annual Percentage Yield (APY) is valid as of 11/26/2024. Personal accounts only. Rates are variable and may change without prior notice. $100 minimum balance to open and avoid fees. Fees may reduce earnings. $250,000 maximum opening deposit when account is opened online. After online opening deposit is verified, you may deposit additional funds to your account. $500,000 maximum balance. Auto Club Trust, FSB.
**Annual Percentage Yield (APY) is accurate as of 11/26/2024. Rates are variable and may change without prior notice. Interest rates are fixed until initial maturity after the account is opened. A $1,500 minimum deposit to open the account and obtain the APY is required. A penalty may be imposed for early withdrawal. Fees may reduce earnings. Personal accounts only.
†Annual Percentage Rate (APR). Rates and terms effective as of 10/11/2024. APR is accurate as of 10/11/2024. Advertised rates and terms are subject to change without prior notice. Additional terms and restrictions may apply. Other loan rates available. Subject to borrower qualification. Advertised rate includes a 0.25% discount when you set up automatic payments from any checking or savings account. Rate is variable. Offer valid on personal vehicle loans only. Criteria to receive the stated APR: Loan term 48 months or less new or used, model year 2018 – 2024 with a credit score of 720 or higher based on the Vantage scoring model. Buyer is responsible for all state or local fees. Auto Club Trust, FSB uses a managed credit program and final APR is dependent on your credit score. An auto loan with an APR of 5.49% for a $20,000 loan at a term of 48 months, your estimated monthly payment would be $465. An auto loan with an APR of 5.74% for a $20,000 loan at a term of 48 months, your estimated payment would be $467. Private party sales will not be financed.
††Terms and Conditions apply. Offer valid for loans on vehicles purchased through the AAA Auto Buying Program from a TrueCar, Inc. (TrueCar) Certified Dealer; and approved and funded by Auto Club Trust, FSB. Applicant must submit the Member Price Summary provided by TrueCar during the application process. Must be an active AAA member to receive the additional TrueCar discounted rate. Loans offered by Auto Club Trust, FSB. Equal Opportunity Lender.
Member Savings currently not available in all states. In these states a "Target Price" is presented, which reflects a market-based example of what you can reasonably expect to pay for a vehicle configured with your desired options. Your configured vehicle may not be available or in-stock at the Certified Dealer.
TrueCar operates this information website ("Service") featuring pricing, performance, technical, and safety data available for new and used vehicles. The Service is not available in all locations.
Products are offered by Auto Club Trust, FSB. Equal Credit Opportunity Lender.
Mortgages originated by Auto Club Trust, FSB. Equal Housing Lender. NMLS# 799629
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