A Roth IRA is a tax-advantaged retirement account accessible to children of all ages. A parent or any other adult can contribute to a child's Roth IRA, as long as the child has earned income during the year. While IRAs may seem simple, it's important to remember key facts. You can only contribute with earned income.
This means that monetary donations from family and friends cannot be deposited into the account. Do not exceed the maximum annual amount per child. And remember to think about whether you want to pay taxes in advance or in the back before opening a traditional or Roth IRA for children. The key to contributing to an IRA is for the child to receive earned income.
In the case of a child, the income earned can come from a variety of sources, such as part-time jobs, summer jobs, or activities such as taking care of children, mowing lawns, or walking routes with paper. Working in a family business is practical and provides flexibility, but as in all cases where a child is employed by a parent or a parent controlled entity, the IRS can be expected to carefully analyze whether the income was actually earned and at a reasonable hourly rate for the work actually done. Establishing and funding a Roth IRA for a child can provide significant future retirement funds, combined with tax-free withdrawals. Contributions to a Roth IRA are not deductible, but if certain conditions are met, distributions are tax-free.
Earnings accumulated within a Roth IRA can be withdrawn tax-free after 59 and a half years (if it has been at least five years since the contributions were first made). However, contributions to the Roth IRA can be withdrawn tax-free at any time. A withdrawal from a Roth IRA is considered to come first from contributions to the account, not from earnings. This can also provide a tax-free source of funding for college or other financial needs that the child may encounter later on.
The effect of compound earnings is dramatic over a long investment horizon. The balance of the IRA after 50 years (or any other period of time) would be the same regardless of whether the IRA was a traditional IRA or Roth. Because Roth IRA withdrawals are not taxable, after-tax results would significantly favor the establishment of a Roth IRA rather than a traditional IRA. In addition, Roth IRAs have no required minimum distributions, so funds can continue to increase tax-deferred after 70 and a half years.
Of course, the tax rules 50 years from now could be dramatically different from the current ones. The power of an extended investment period and tax-deferred capitalization is more obvious when you compare the results of an IRA funded as a child with what it would take to generate the same retirement funds with an IRA funded as an adult. Albert Ellentuck is a counselor at King & Nordlinger LLP in Arlington, Virginia. Business lunch deductions after TCJA peculiarities driven by tax relief.
Once you've given the money to your child, you can only put it into your IRA if you're eligible to make a contribution to the IRA. An IRA can allow a child to protect investment income (portfolio) from taxes (if a traditional IRA is used) and establish a retirement fund that can take advantage of many years of tax-deferred growth. While you might see brokers touting a Roth IRA for children (like Fidelity Investments does) or something like that, there's nothing special about the way an IRA for children works, at least as far as the IRS is concerned. Next, we'll discuss two types of IRAs for children, the benefits offered by these tax-advantaged investment vehicles, and how to open and contribute to an IRA for children.
The rules that prohibit a contribution or deduction to a Roth IRA for a contribution to a traditional IRA (i. . .