Successfully Build Your Kid's Financial Future

Written by Ellen Katz

You can help your child or grandchild by contributing to their Roth IRA. By socking away money in a Roth IRA, you could help youngsters pay for college and even buy a home someday.

For most teens, saving money for retirement seems like a ridiculous waste of resources. After all, there are so many other priorities before they have to worry about retirement. But by socking away money in a tax-favored Roth IRA, your youngsters can help pay for college and even buy a starter home someday. 

Teaching Your Kids to Invest
You can give to your child's Roth IRA as long as they have earned income.
The Roth could help fund your child's college education.  

Roth IRAs, which first became available in 1998, are considered by many financial experts to be "too good to be true" because they allow earnings to build up tax-free. You don't get a deduction for your contributions, but any withdrawals made after age 59 1/2 are tax-free as long as the account has been open five years. And if the account holder decides not to touch the money and let it pass on to a younger person after death, the beneficiary will never have to pay taxes on the cash. 

So what does all this have to do with a teen's finances? The younger a Roth account holder is, the more time there is to build up a tax-free stockpile. And money placed in a Roth IRA isn't necessarily locked away until retirement. The tax law allows money to be taken out in some special circumstances. 

The special circumstances include: 

College costs. There is no 10 % early withdrawal penalty due on any funds taken to pay higher education expenses for the IRA holder, or the person's spouse, children or grandchildren. This includes tuition, room and board, books and supplies. You will have to pay taxes on the withdrawal as it is taxed as income. 

First-time home buying costs. No early withdrawal penalty or tax is charged on up to $10,000 if the money is used to purchase or construct a first home. 

Who is eligible to open a Roth IRA? Anyone with "earned income" can contribute up to $5,000 a year as long as their incomes aren't too high. So teens with part-time jobs are able to fund Roth IRAs based on their earnings. 

Of course, with clothes, cars and CDs to buy, the last thing kids want to do with their hard-earned cash is put it away for practical purposes. But the money doesn't have to come from their own pockets. As long as the children have earned income, their parents or grandparents can give them $5,000 a year to put in Roth IRAs. For example, let's say your 15-year-old son has a part-time job that pays $4,000 a year. He is allowed to make a $4,000 annual Roth IRA contribution. 

You can give him $4,000 to start an account. The money can be put in bank accounts, stocks, mutual funds or other investments. Every year, as long as your son keeps working, you can contribute to his account. In fact, you and your spouse can each set aside $5,000 in your own Roth IRAs, if you meet the income limitations, and fund Roth accounts for your working children. 

With this approach, the kids get to keep their money and your family builds a nice tax-sheltered nest egg for the future.

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