Question

Assume that you have a three-year-old daughter and you have come to appreciate the power of saving and investing. Can you open up and put money into a Roth IRA in your child's name so that she can benefit from many years of compounding

Answer 1

You cannot open a Roth IRA for your three-year-old daughter as she must have earned income. Investing for her future can be done through other types of accounts until she can earn income to qualify for a Roth IRA.

Step-by-step explanation:

To open a Roth IRA in your daughter's name, she must have earned income from a job or a business, as this is a requirement for contributing to a Roth IRA. Since your daughter is three years old, she is unlikely to have earned income, and thus you cannot contribute to a Roth IRA on her behalf legally. However, understanding the value of early saving and investing is crucial, and there are other ways to benefit your child's future financial stability.

For example, you could put money into a custodial account that transitions to her control when she reaches adulthood. Alternatively, you could save and invest in your own retirement accounts with the intention of helping her in the future. Once your daughter has income from work, you could then open a Roth IRA in her name to take advantage of compound interest over time.

The earlier savings and investing begin, the more one can reap the benefits from compound interest, as indicated by the compound interest formula provided.

Answer 2

No.

You cannot open up and put money into a Roth IRA in your child's name.

Step-by-step explanation:

The IRS allows that any child, regardless of age, can contribute to an IRA if they have earned income. This means that only a child that has earned income can have an IRA opened for him or her. As the child is still underage, the IRA must be set up as a custodial account by the parent or another adult. This implies that the child cannot operate the account during the period she is underage but can have money saved in the account from her earned income.