Did your child or grandchild have a job this summer? It’s great for them to have their own hard-earned cash, and it offers a way for you to help them save for the future, tax-free. It’s a retirement plan for teenagers.
You can open a Roth IRA in the child’s name and contribute as much as the child makes during the year (up to a $5,000 limit). The contribution you make will count toward the $14,000 annual gift tax exclusion (and up to $28,000 if your spouse is also generous).
That money can grow to a nice fat Roth IRA by the time the child is 65. A one-time $5,000 contribution to a 16-year-old’s Roth IRA that earned 6% a year would grow to $87,000 at age 65 and $116,000 at age 70. If you continue this for a few summers and make contributions each year, the account would become much larger.
Why a Roth IRA?
There are several advantages. First, all withdrawals made after age 59 1⁄2 are tax free. And the child can pull out contributions (but not the earnings on the contributions) free of tax at any time. That money could be used to help pay for college or purchase their first home. Another bonus is that because the money is in a retirement account, it is not assessed by the federal government when applying for college financial aid.