Roth I.R.A.s for Kids: First, Earn That Money

Susan Allen, senior manager for tax practice and ethics at the American Institute of Certified Public Accountants, said she had opened a Roth at age 16, with her father’s encouragement; he matched part of what she earned from working in retail and teaching ballet.

“I have every intent to do it with my own children, too, when they have earned income,” she said.

To help things go smoothly, keep documents showing that the contribution was valid in case of a tax audit, financial planners recommend. A child who receives a paycheck will get a W-2 form showing the earnings. If the money is from self-employment, it’s smart to keep a detailed log, noting the date, service provided and amount paid (such as “June 18, babysitting for the Smiths, $50”).

It may be helpful to have the child file an income tax return, Mr. Slott said, even if the income falls below the federal filing threshold. The return will document the earned income, he said, and can help with tracking contributions. Unlike contributions to a traditional I.R.A., contributions to a Roth I.R.A. (but not the earnings) can be withdrawn at any time, for any reason, without penalty, he said.

And note: A child who earns more than $400 in self-employment income after expenses may have to file a return anyway; consult a tax professional.

Most kids won’t earn much, but even a little can get the account started — and early saving can make a big difference over time. According to a hypothetical example from Fidelity, someone contributing $3,000 per year to a Roth from age 15 to 20, and then contributing the maximum allowed amount annually until age 70, could accrue more than $3 million, assuming an annualized return of 7 percent. The same person starting at age 20 would accumulate about a million less.

Roths also offer flexibility. In general, to avoid taxes and penalties, an account owner can’t withdraw earnings before age 59½, and the Roth must have been open for at least five years. But there are exceptions for early withdrawals for certain reasons, like a down payment on a first home or college expenses.

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