The Gift of a Roth IRA for the Holidays
For this holiday season, giving the gift of a head start to lifetime of financial security to the children in your family by giving funds to contribute toward their Roth IRAs. As there is no lower age limit for having a Roth IRA if a child has earned income, also, an early start on saving can have an incredible long-term payoff through the ability of compound interest.
Your gifts that are joined to their working and saving may teach them the payoff from earning and investing, of which would provide an educational benefit that itself proves extremely valuable over a lifetime.
It is not too late to open Roth a IRAs for 2017, the deadline is April 17, 2018. The limit to contribute is based on the amount of the child’s income or $5,500 whichever is less. If a child is a minor (under age 18 to 21, depending on state law) a “guardian IRA” can be open for the child.
Any source of earned income such as lifeguarding, waiting tables, self-employment like babysitting, mowing lawns or even answering phones, filing papers for a family business would be considered eligible to contribute toward a Roth IRA
If a child has already spent all his or her earned income that's not a problem – with the earned income requirement met, contributions to Roth IRAs can be made with funds received by gift.
Rewards to Youth
Saving while so young can have an immense reward. Morningstar reports with stocks having earned an average 7% over inflation over the past 100 years, a rate at which amounts double every 10 years. Just saving $5,500 annually from age 14 through 24 and earning 7% provides $1.06 million at age 61 on contributions of only $60,500 – saving nothing after age 24!
Another reward for saving while young, also makes it safer to invest for high returns. Stocks provide a high average return but can be volatile, creating risk for persons in or near retirement years. Children decades away from retiring need not fear this risk. Indeed, 'safe' investments can be costly for them. A safe and steady 3% return from bonds reduces the $1.06 million in our example to only $210,000.
There are other benefits for children that have Roth IRAs. Contributions to a Roth IRA can be withdrawn any time for any reason, with no tax or early withdrawal penalty, creating tax-free savings available at any time. Even earnings in a Roth IRA can qualify as tax and penalty free after age 59 1/2. In comparison to distributions from Traditional IRAs are taxable and generally subject to a 10% early withdrawal penalty before age 59 1/2. The deduction for contributions to a Traditional IRA has little or no value to a child in a very low or zero tax bracket. In addition, IRA assets also are not counted in standard college financial aid formulas, so they don't reduce eligibility for financial aid, unlike savings in taxable accounts.
Make sure that good records are kept for the children and their IRAs. Keep their income "on the books", reported on a parent's or the child's own tax return. If the child's income comes from a family business, document that it is genuinely earned, also be sure to monitor IRA investments carefully.
With this gift, you can enjoy many years to come to looking forward to the children you have helped toward their financial future.
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