Open A Roth IRA For Your Child

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

If your son or daughter is working this summer, have them open a Roth IRA.

The Roth IRA is a retirement account that not only grows, tax-free, and is tax-free in retirement, but also allows for current withdrawals of the principal (the money you contributed) without penalty. All of this ‘free’ stuff is because there is no tax deduction when a contribution is made into the account.

To qualify for a Roth IRA, your child must have ‘earned income.’ Earned income can be from working for wages, or from being self-employed. Self-employed includes babysitting, mowing lawns, or any other activity, except payments for household chores.

The contribution to the Roth IRA is based on the earned income, maxing out at $5,000. So if the earnings are $3,000, then $3,000 is all that can be contributed; but if the earnings are $6,000, then the maximum of $5,000 can be contributed.

The tax law allows you, your parents, grandparents, or anyone to give your child the money for the Roth. The money does not have to be from the child’s earnings.

With the Roth IRA, there is no tax deduction, as there generally is with the Traditional IRA, but kids don’t need the deduction anyway. There are some limitations as to the withdrawal, but generally withdrawals are totally tax-free from federal, state, and local tax. The Roth IRA can be used as an ‘emergency’ fund, or to save for college, a car, a wedding, a new home, or anything else. While I don’t recommend withdrawing from the account, it is there if necessary.

Teach responsibility and encourage your child to save by matching their contribution.

Like the Traditional IRA or the 401(k), the funds can be invested in stocks, bonds, mutual funds, bank CDs, and money market accounts. These accounts can be set up at your bank, brokerage house, or any financial institution. And, like the Traditional IRA, the contribution can be made in the year the income is earned, or by the due date of the tax return, April 15 of the following year.

Roth IRA Benefits:

• Tax-Free Growth
• Tax-Free Withdrawal of principal at any age
• Tax-Free Withdrawal of earnings after 59-and-a-half years of age
• No Minimum Withdrawal, even after retirement age

Roth IRA Restrictions:

• No tax deduction
• Early withdrawal penalty on earnings before 59-and-a-half years of age — but there are exceptions

Have you saved enough for your retirement? Why not start your children on the right road.

Have a good week.

Quip of the week: Government failure always justifies more government.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.