Give your kids the power of a Roth IRA. Would you like to give your child a head start on smart money habits? Here’s our suggestion – have your child invest in a Roth IRA. Why? The tax-free compounding of contributions and investment returns over your child’s lifetime is a superior wealth-builder.
Here are the facts about about children investing in a Roth IRA:
- There is no minimum age to open a Roth IRA account. All your child needs is earned income, either from a summer job or from self-employment. Yes! Your kids can work for you! See below about the tax benefits to employing your children (ask us for details to see if your business qualifies).
- The maximum contribution to a Roth IRA for 2015 is $5,500. Your child can contribute less and you can provide some or all of the cash, up to the amount of your child’s earned income.
- Your child won’t receive a federal tax deduction for a Roth IRA contribution – however they will not pay federal or Virginia income tax on qualified distributions taken after age 59½.
- You can continue to claim your child on your tax return as a dependent. Your child is also allowed a federal standard deduction of $6,300 for 2015, which means the first $6,300 of earned income is income-tax free.
- If you own a business and can employ your child, you can benefit from additional tax savings, including a payroll deduction for your business. In addition, depending on how your business is organized, you may not have to pay federal payroll taxes such as FICA, Medicare and unemployment. Remember, your child must perform real services and the wages can’t be excessive.
- An early Roth IRA withdrawal could affect your child’s college financial aid. Your child can take withdrawals from a Roth penalty-free to pay for college costs. But those withdrawals generally count as income when applying for financial aid.
Are you interested in learning more about how your children can start investing in a Roth IRA? Give us a call (757) 926-4109. We’ll help you get started on saving for your child’s future.