A summer job is a great way for kids to take on some additional responsibilities, and begin learning about money. In addition to learning about hard work and the value of a dollar, they’ll also gain independence having their own income to spend and save as they best see fit. As financially savvy parents or grandparents, if you’re looking for an additional way to make their summer job more rewarding, opening a Roth IRA for your kids may be one of the best ways to reward them and teach them about savings and the value of compound tax-free growth.
Opening a Roth IRA for minors has many advantages, especially for your children. As their summer jobs are unlikely to leave them with any tax liability, it creates the perfect opportunity to contribute to a Roth IRA on their behalf. Contributions can be made for 100% of their earned income, up to $5,500 per child. So, if a child earned $4,000 as a lifeguard over the summer, you could contribute up to $4,000 into a Roth IRA in their name that you would have control over.
Once the Roth IRA is setup and the contributions are made, it creates a great opportunity as parents to work with your kids to choose the best investments. As the account is a Roth IRA, all gains in the account will be tax-free, and the value of compounding interest will begin to materialize as time goes on. There is also a great deal of flexibility within the account as well. For example, a Roth IRA allows the owner to take out 100% of their contributions at any time after five years, with no tax liability or penalty. The earnings can be taken out after age 59 ½ tax-free.
Establishing a Roth IRA for your children allows them to take advantage of tax-free growth beginning at a young age. While the kids may be more concerned about buying a car, or having enough money to go out with friends, parents and grandparents can establish a Roth IRA for minors, and make contributions up to their earnings, which will provide them with a substantial benefit later in life. They may not be excited about the idea now, but they will thank you many years down the road.