What is a Roth IRA? A parent’s guide

Retirement may seem a far way away, especially for your kids, but helping them develop early saving and investing habits can set them up for financial freedom when that time comes. A Roth IRA is a tool that can help you and your kids invest that money for retirement tax-free. It’s a common talking point for prospective retirees, but how does it work and why might it be beneficial for you and your kids to consider using one? 

What is a Roth IRA?

The government created the Roth IRA to incentivize people to invest for their retirement. The account is tax-sheltered, meaning that any money you put into the account can be invested and when that money grows, you don’t get taxed on that growth, as long as you leave it in there until retirement. Once you start taking money out of a Roth IRA at retirement, it’s all yours, meaning you don’t owe any taxes on it. 

How does a Roth IRA work?

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When you get paid from working a job, taxes are taken out of your paycheck before the money hits your account. So, when you put that money into a Roth IRA, you’re protected from paying taxes on it again. Here’s a few key rules and features to know:

• Retirement age: You can take any money out of your Roth once you’re age 59½ and not pay taxes on it.

• Contributions: Because you’ve already paid taxes on the money you put into the account, you can withdraw contributions at any time without taxes or penalties.

• Earned income: Contributions must be made with money that you have earned from a job or business.

• Contribution limits: For 2025, you can contribute $7,000 a year into a Roth IRA. If you are over age 50, you can contribute an extra $1,000 a year. 

• Early withdrawals: Money that has grown beyond what you have contributed is subject to a 10% early withdrawal penalty if you take it out before retirement age. You will also have to pay income taxes on that money. 

• Five-year rule: A Roth IRA must be open for at least five years before withdrawing money at retirement age to qualify for tax-free withdrawals. 

Who can open a Roth IRA?

There are three basic ways you can open a Roth IRA:

• Earned income: If you earn money from working, you can open a Roth IRA.

• Spousal Roth IRA: Non-working spouses can open a Roth IRA in their name if the couple files their taxes as married filing jointly and the working spouse earns enough income for both to contribute.

• Minor Roth IRA: Parents can open a Roth IRA for their kids as long as the child earns income from working. The parent serves as the custodian until the child is an adult and converts the account to their own Roth IRA. The child can contribute up to as much as they earned during the year or the annual IRA contribution limit, whichever is lower. 

Income limits

If you make too much money, the amount of money you can contribute to a Roth IRA might be reduced or eliminated. This is determined by your modified adjusted gross income (MAGI), which is your adjusted gross income with certain tax deductions or exclusions added back in.

In 2025, if you make more than $150,000 as a single filer, your ability to contribute will be reduced. For married filing jointly, this threshold is $236,000.  

Why it might be a good idea to open a Roth IRA

Here’s a few reasons you might consider opening a Roth IRA:

• Tax advantage: You don’t pay taxes on the growth if you follow the rules.

• Compound interest: The earlier you start investing, the more time your money has to compound. No taxes means that’s more money compounding for you. 

• Flexibility: In a pinch, you can take out what you put in (your contributions) without penalty, if needed. It’s recommended to have an emergency fund to reduce the need of tapping into your retirement funds, though. 

How to open a Roth IRA

Here’s a basic overview of how you can open a Roth IRA for yourself, your spouse, or a child:

• Pick a financial institution, such as a bank or brokerage firm.

• Register the account in the account holder’s name. 

• Contribute money into the account.

• Select your investments, such as stocks, mutual funds, or ETFs.

• Track your account, including your contributions each year and any withdrawals you make to avoid surprises.

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Encourage an early start

Whether a Roth IRA is the right account for you or your family, share what you’ve learned with your kids to begin having money conversations and teaching them financial literacy that can stick with them their entire lives. Just like small investments can add up over time, small money conversations can, too.

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© 2025 Greenlight Investment Advisors, LLC, an SEC Registered Investment Advisor provides investment advisory services to its clients. Investing involves risk and may include the loss of principal. Investments are not FDIC-insured, are not a deposit, and may lose value.