Teenager + Earned Income = Roth IRA
As tax season comes to a close, so is the deadline to make 2018 IRA contributions. Look beyond you and your spouse for tax planning and ways to save.
Have a teenager?
Did they earn income babysitting, mowing lawns or selling ice cream?
You can open a Roth IRA for Kids in a child’s name to help them save for retirement, a first house or qualified educational expenses.
Roth IRA for Kids. There is no age minimum, as long as they earn income. It’s up to you to document that they had income earned from work, either W-2 or self-employment taxable wages. The money can’t be an allowance or a gift.
Once the account has been open 5 years, the advantages of tax-free earnings and withdrawals are same as Roth IRA. Recall a Roth IRA’s tax treatment is most valuable when time horizons are long and current tax rates are low, both true for kids.
Adult supervision. The account owner is the child, however an adult maintains control and invests for the benefit of the child. Once child becomes an adult, usually 18 in most states, the account is transferred.
What if they spent their earnings? After a talk about budgeting and not needing the latest phone, you or a grandparent can set up the account and fund up to the amount of your child’s earned income. Some parents will make contributions as a ‘match reward’ for money earned in a summer job.
Impact to financial aid? Yes, in a great way. The “expected family contribution” or “EFC” formula has student owned assets assessed at 20% with two notable exceptions: 529’s at parent’s 5.6% and retirement accounts owned by you or your child are not counted or 0%. However, if a child takes money from a Roth IRA, even to pay for college, up to 50% of the withdrawal may be assessed.
Act by April 15th. Not all institutions offer Roth IRAs for Kids, but many do with no minimums and low fees. Consult your advisor or seek a fee-only CFP to learn more.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Glenn Brown is a Holliston resident and owner of PlanDynamic, LLC, www.PlanDynamic.com. Glenn is a fee-only Certified Financial Planner™ helping motivated people take control of their planning and investing, so they can balance kids, aging parents and financial independence.
Please call me at (508) 834-7733 or directly schedule a meeting to learn more about college savings, retirement planning and aid strategies.
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