Function

• If your child earns an income from some type of work, she is eligible to set up an IRA. You can set up a custodial IRA for her to allow her to save money for retirement. The money your child saves could be used to pay for qualified education expenses or for a first home. Setting up this type of account can give your child a head start in life and the money she needs for big life events in the future.
  
  

Types

• If you desire to set up a custodial IRA for your kids, you could set up one of two different types: a traditional IRA or a Roth IRA. The traditional IRA is funded with pre-tax dollars. When your child withdraws the money when he turns 59-1/2, he will pay taxes on the money. If you set up a Roth IRA for him, he can fund it with after-tax money. Then when he takes out the money in the future, there will be no taxes due.
  
  

Rules

• Until your child reaches the age of adulthood, you have to open the account as a custodial account. You will watch over the account for your child and when she reaches 18 or 21, depending on what state you live in, she will take over the account. In addition, the child can only contribute as much as she earns. For example, if she earns $3,000 for the year, she can contribute a maximum of $3,000 to the account.
  
  

Benefits

• With this type of account, your child can invest the money into many different securities such as stocks, bonds and mutual funds. The money your child earns from these investments can accumulate tax-free. This allows the money to compound while it is in the account. Getting started early can allow your child to create a large amount of money by the time he retires. Another benefit is that he can have a source of money when he needs access to some in the future. With a Roth IRA, he can withdraw the money he has contributed without any penalty.
  
  

Considerations

• If you want to help your child get started, you could pay her for chores that she does around the house and put the money into an IRA. Children get a standard deduction amount for the year and as long as you pay them less than that amount, they will not have to pay any taxes on the money that they earn. Your child can put the money into an IRA or a Roth IRA and start earning tax-advantaged returns in the investment markets.