Tax Planning Idea - ROTH IRA for your working teenagers
by Lester Bahr, CPA on 09/01/15
Working teenagers are treated just the same as adults for purposes of contributing to a ROTH IRA. Therefore, they can qualify to contribute to a ROTH IRA as long as they have earned income up the maximum of $5,000 per year. Sorry, but no, gifts from parents or other family members do not count as earned income.
The advantage of encouraging your teens to set up a ROTH IRA is that by starting very early and sticking with it, they can accumulate a substantial amount of wealth that is sheltered from paying tax on the income and capital gains each year within the ROTH IRA account.
Plus, due to the flexibility of a ROTH IRA, while primarily designed as a retirement tool, you can also withdraw the money to be used for qualified education expenses. While the earnings (but not the original contribution portions) of the withdrawals are taxable, they are not subject to the 10% early withdrawal penalty.
Another use for the ROTH IRA is that your child can eventually withdraw up to $10,000 toward the purchase of a house and those withdrawals are both penalty and tax-free.
Plus, by encouraging your children to setup and fund a ROTH IRA you will be teaching them good savings habits that will benefit them over their lifetime.
Lester R Bahr, CPA
