As summer break approaches, there are opportunities to teach your children valuable financial skills. Maybe they plan to work a summer job, need their own source of money, or both. Now is a great time to consider opening a secured credit card and Roth IRA for them.
Secured Credit Card
If your child has turned 18, a secured credit card is a great first step in helping them build good credit history. These credit cards differ from the traditional by requiring a monetary deposit in an account. You determine the amount to deposit, which also determines the credit limit of the card. This gives you the flexibility of setting your child’s spending, while also protecting them from the risk of getting into debt. Secured credit cards can be utilized just like any other credit card, and most importantly establishes credit unlike a debit card. You can find secured credit cards that are specifically made for teenagers, with some allowing those under 18 to apply.
These proactive first steps will pay dividends later in life when they begin to apply for their own car insurance, loans, and credit cards, or purchase their first home. The importance of creditworthiness extends beyond these large financial products, as some landlords will check credit scores as part of the rental application process. You can also begin educating your child about these important financial lessons and help them start a habit of paying their credit card bill in a timely matter. Building good credit takes time, the sooner your kid can begin, the better.
Roth IRA for Kids
If your child has received earned income from a part-time or summer job, opening a Custodial Roth IRA for them can be a smart financial move for several reasons.
- Tax advantages: A Roth IRA is a tax-advantaged retirement account, meaning that contributions are made with after-tax dollars, but the money grows tax-free. This can be especially beneficial for children because they typically have a low tax rate or no tax liability at all. By contributing to a Roth IRA early on, your child can take advantage of decades of tax-free growth.
- Long-term savings: Investing in a Roth IRA is a great way to encourage your child to develop good savings habits early in life. By contributing to a Roth IRA for your child, you are setting them up for a secure retirement in the future. Plus, since the account can be opened at an early age, the money has more time to grow.
- Financial education: By opening a Roth IRA for your child, you can help teach them about investing and the importance of saving for retirement. You can involve them in the process, show them how to manage the account, and even discuss investment strategies.
- Flexibility: Roth IRA contributions can be withdrawn at any time without penalty, so the money can be used for things like education or a down payment on a home. While it’s generally recommended to leave the money in the account for retirement, having the flexibility to withdraw funds in case of an emergency can provide peace of mind.
Additionally, you can make contributions to their Roth IRA up to the amount of their earned income for the year or $6,500 in 2023, whichever is lesser.
We believe in financially empowering others, and we know you want to do so with your family. We are always happy to provide information and advice on how you can get started.
Associate Financial Advisor
Commentary: The opinions expressed are those of Alaska Wealth Advisors Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.
Note: This material should not be construed as tax advice. You should always consult with your tax professional with regard to specific tax questions and obligations.
Adviser Disclosure: Alaska Wealth Advisors is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2, which is available upon request.