Monday, October 25, 2010

Can Your Kids Have Roth IRAs?

        IMG_2868Image by littlemaiba via Flick
With the past summer and the holiday season coming up many kids our working and earning money. Is it possible for them to put their money in Roth IRAs? 
 
The only requirement to have a Roth IRA is earned income for the year. Age doesn't enter into it. So if your kid earns money, they are entitled to make a Roth IRA contribution. For the year 2010 the rule is the contribution can be the total amount of income or up to $5000. This contribution amount is for a Roth or traditional IRA. 
 
Is the Roth IRA better than the traditional IRA? 
 
One way it is better than a traditional IRA is that you can withdraw all or part of it without any income tax or penalty to pay for college or any other reason. But rule is you cannot withdraw the earnings tax free till age 59 1/2. 
 
Even though contributions can be withdrawn anytime without tax or penalty consequences it's best to leave it in the account to grow tax free till retirement. If it's in a traditional IRA, all distributions will be taxed and there is a 10% penalty, unless their money is used for college costs. 
 
What about tax deductions? 
 
If your contributing to a Roth IRA there are no tax deductions. If your contributing to a traditional IRA the tax deductions are negligible to none. It would make sense only if your child makes a significant amount of money. 
 
Teaching our children to save is one of the greatest gifts we can give them. Also instructing them to invest in a Roth IRA is a great way to teach them to save. And with the tax advantage it's even better. Your is never to young to learn about the ways to save and minimize taxes or avoid them. 


4 comments:

  1. Of course kids can have a Roth IRA. But the trick is convincing them they should invest their earnings in a Roth instead of spending it having a good time with their friends.

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  2. The best thing we can do for our kids is teach them to prepare for the future with savings and retirement savings.

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  3. Dave - one important point - that kid will probably pay no tax by claiming the income so given the choice, Roth or traditional, it's Roth all the way.

    My 12 year old babysat in 2010, and already has her Roth set up. She will graduate HS with a larger retirement account than many retirees.

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  4. I agree, with all the benefits of a Roth, getting the kids started early is the way to go.

    ReplyDelete

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