As a parent, you want to do whatever you can to make sure your children have a bright future. This includes enhancing their financial security. While there are a lot of savings options out there, one of your best strategies just may be a twist on the typical Roth IRA.
Roth IRAs are for all ages
A Roth IRA differs from a Traditional IRA in that contributions are not tax-deductible, but withdrawals at retirement can be tax-free. Up to $5,500 per year can be deposited into a Roth IRA (under age 50), limited only by the account owner’s earned income. What is not commonly known is that a Roth IRA can be opened at any age. As long as your child has earned income, he or she can participate in a Roth IRA.
The power of this strategy comes into play when contributions are started early and made over regular intervals. For instance, a contribution of $3,000 per year starting at age 12, at an 8 percent annual compounding rate, will result in a balance of more than $1 million by age 53.
Early Roth IRAs pay in other ways
Roth IRAs can also be used to help your child pay for college without incurring an early withdrawal penalty, although some amounts withdrawn may be subject to income tax. In addition, a Roth balance will not be held against your child when applying for need-based college financial assistance. And as long as the Roth has been opened for five years or more, your child can use up to $10,000 to help pay for his or her first home. For home-buying, there is no early withdrawal penalty and the amount taken out is not subject to income taxes.
The Roth challenge: earned income
The big challenge in setting up a Roth is to create legitimate earned income for your child, which is necessary to fund an account. If you own a small business, consider employing your children to help clean up around the office. Consider part-time jobs or babysitting. As long as you can prove there is appropriate income to support the annual contributions to their Roth IRA, you can take advantage of this tax-free savings opportunity.
Leveraging a Roth IRA with the power of compound earnings takes planning, persistence and skill – but it certainly can be done. Call our office at (888) 388-1040 to discuss the best strategy for your family.
Year-End 2017: This newsletter is issued annually to provide you with information about minimizing your taxes. Do not apply this general information to your specific situation without additional details. Be aware that the tax laws contain varying effective dates and numerous limitations and exceptions that cannot be summarized easily. For details and guidance in applying the tax rules to your individual circumstances, please contact us. ©MC
