If your son or daughter has a summer job this year you should consider opening up a Roth IRA account.
To qualify for an IRA your child must have “earned income” — wages or “net earnings from self-employment.” Money you give your child for doing chores around the house won’t count, but earnings from babysitting or mowing lawns may qualify.
You can contribute 100% of your child’s earnings to the account, up to a maximum of $5,000. If your son earns $2,400 for the summer you can contribute $2,400 to a Roth IRA for him. If he earns $6,500 you can contribute $5,000. There is nothing in the tax code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.
There is no tax deduction for contributions to a Roth IRA, but most teenagers don’t need the deduction. Qualified distributions from a Roth will be exempt from income tax.
You can use a Roth IRA to encourage your children to work or to save. If your son earns $5,000 in a part-time job, open a Roth IRA for him. Or, if your daughter agrees to put $2,500 of her salary in a Roth, match it and put in another $2,500.
If you put the maximum into a Roth each year for your 16-year-old from 2010 through 2015, when he/she will turn 21, and no other contributions are ever made, the account could grow to as much as $500,000 by the time the child turns 65.
There is a potential problem with opening a Roth account for a child. Once the child reaches the “age of majority,” usually 18, he/she will have full access to all the funds and can “take the money and run.”
New Jersey tax pro Robert D. Flach has been preparing 1040s for individuals since 1972.