A Roth IRA offers tax-free growth, making it a very attractive vehicle for young investors to take advantage of decades of compounding. If a child has earned income from a summer job or other work, a full or partial Roth contribution may be an option. Earned income does not include interest or dividends. A child must have earned income, but he or she does not have to contribute the money to the Roth; a parent (or anyone else) can fund the Roth IRA.
Accounts for minors are usually established with an adult custodian to oversee the account until the child is 18 or 21. Any money contributed to the kid’s Roth IRA by someone else is considered a gift. This may be accomplished without any income tax or estate tax complications through use of the annual gift-tax exclusion. This link may help answer questions about the gift tax.
The current limit for a 2016 or 2017 tax-year Roth contribution is $5,500 a year for an individual under the age of 50. One must also have adjusted gross income below certain levels to make Roth contributions, which generally won’t restrict young savers (for the 2016 tax-year, below $117,000 for a single filer or $184,000 for a married couple to make full contributions). The deadline for a 2016 tax-year contribution is April 18, 2017.
Roth IRA owners may withdraw contributions at any time without taxes or penalties. Earnings growth above contributions may be taxable and subject to a 10% penalty if withdrawn before age 59 ½. There is no mandatory withdrawal age, meaning assets can continue to grow tax-free even well into retirement. Upon death, a Roth IRA can pass income tax-free to heirs. Non-spouse heirs must take distributions based on their life expectancies set by the IRS but the required distributions are generally tax-free.
This site has a number of job ideas for kids of different ages while this link covers Roth IRAs in more detail. Funding a Roth for children can be overlooked during a hectic tax season. The sooner contributions are made, the sooner any future investment gains will be sheltered from taxation.