Did you know that a minor child can have a Roth IRA? Of course, the child can only contribute as much as he has earned in any given year (up to $5,000), but in a recent Forbes article, William Baldwin suggests using a Roth as a strategy for building wealth for your children. Here’s a summary:
If you have a child who is old enough to work, strike this deal: for every dollar your child earns, you’ll contribute a dollar to his Roth IRA. Your child gets to spend his earned funds as he normally would. Money going into a Roth IRA is not tax-deductible, but this likely won’t make a practical difference, because most teenagers don’t have enough income to pay income tax anyway. The true benefit of a Roth is that future withdrawals, including withdrawals of interest earned on account contributions, are completely tax-free as long as your child heeds applicable IRS rules.
So, if your child waits until after he reaches age 59 ½ to take money out of the account, there will be no taxes and he’ll get the benefit of many decades’ worth of growth. Of course, Baldwin points out, you’ll want to be aware of the effect this plan will have on your child’s ability to qualify for college financial aid; and, this is not a great move for parents who are not already fully funding their own retirement accounts.