With summer coming to an end, many kids are wrapping up their summer jobs and preparing for a new school year. It’s the perfect time to reflect on their summer paycheck and encourage kids and grandkids to kick-start their savings.
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 (note, earned income does not include interest or dividends). While the child must have earned income, he or she does not have to contribute the money to the Roth; a parent (or anyone else) can fund the Roth IRA (a non-material birthday or holiday gift idea, perhaps?)
Roth IRA accounts for minors are usually established with an adult custodian, such as a parent or grandparent, to oversee the account until the child is 18 or 21. Any money contributed to the child’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 2023 Roth contribution limit for an individual under the age of 50 is $6,500. One must also have adjusted gross income below certain levels to make Roth contributions, which generally won’t restrict young savers (for the 2023 tax-year, below $138,000 for a single filer or $218,000 for a married couple to make full contributions). The deadline for a 2023 tax-year contribution is April 15, 2024.
Wondering if you can contribute to a Roth IRA? Our flowchart will guide you.
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 Earnings growth above contributions may be taxable and subject to a 10% penalty if withdrawn before age 59 ½. Roth funds can be withdrawn without the 10% penalty if used for certain qualified expenses, such as a first-time home purchase or qualified education expenses. 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.
Funding a Roth IRA 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.
Do you know a child who’s ready starting earning income? Here are some job ideas for kids of different ages.
ICYMI here are some related articles:
