Friday, June 8, 2012
OPEN A ROTH FOR YOUR KID
I recently posted a “summer” rerun on dependents and income tax withholding. Here is some related advice -
If your son or daughter has a summer job you should consider opening up a Roth IRA account for him or her.
To qualify for an IRA your child must have “earned income” — wages or “net earnings from self-employment.” Money you give your child for doing chores around the house doesn’t count, but earnings from babysitting or mowing lawns may qualify.
You can contribute 100% of your child’s earnings to the account, up to a maximum of $5,000. If your son earns $2,400 for the summer you can contribute $2,400 to a Roth IRA for him. If he earns $6,500 you can contribute $5,000.
There is nothing in the tax code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.
There is no tax deduction for contributing to a Roth IRA, but most teenagers don’t need the deduction. Qualified distributions from a Roth will be exempt from federal, and probably state, income tax (assuming the idiots in Congress don’t change the law in the future).
You can use a Roth IRA to encourage your children to work or to save. If your son earns $5,000 in a part-time job, open a Roth IRA for him. Or, if your daughter agrees to put $2,500 of her salary from a summer job in a Roth, match it and put in another $2,500.
If you put the maximum into a Roth each year for your 16-year-old from 2012 through 2017, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.
One caveat - there exists a potential problem with opening a Roth account for a child. Once the child reaches the “age of majority,” usually 18, he/she will have full access to all the funds and can “take the money and run.”