W-2 tax documents should be arriving for income earned during the calendar year of 2011. Any child or grandchild that receives a W-2 can make a Roth contribution based on this income. Funding a Roth IRA, or any retirement account for that matter, is usually not a priority for a teenager’s part-time income. This is an opportunity for parents or grandparents to start saving for the child while they are young. Small amounts invested can go a long way when you are young and have years for the money to compound.
The maximum Roth contribution for 2011 is $5,000 or 100% of earned income, whichever amount is smaller. There is no age restriction, so this can be done for teenagers with a summer income. I have several clients that wait until their grandchild gets their W-2 statement and then fund their Roth for that amount. If they made $2,417 working that summer, that’s what the Roth is funded for that year. The deadline to fund a Roth for 2011 is April 17, 2012.
Roth IRAs are retirement accounts and don’t count as an asset for determining eligibility for financial aid. You could continue to fund a Roth for someone while they are still going to college.
Adult children living on their own may also qualify for the Retirement Savings Contribution Credit, known as the Saver’s Credit, based on your gift to their Roth IRA. This credit may allow them to get a tax credit for up to half of what you contribute to their Roth IRA. They cannot be claimed as a dependent on anyone else’s tax return, and their income must be within guidelines to qualify.
A final point to remember is the rules for gifts. You are allowed to give up to $13,000 in 2012 to any number of people, without facing any gift taxes. This would only be an issue if you were giving beyond funding a Roth IRA to one person.