Should Your Child or Grandchild Have a Roth IRA?

While retirement might not be a high priority for young children, starting a Roth IRA early and making small contributions can go a long way over time.

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Funding a Roth IRA, or any retirement account for that matter, is usually not a priority for a teenager’s part-time income. For young adults, competing priorities may crowd out savings goals. However, a Roth IRA provides an opportunity for parents or grandparents to start saving for children while they are young. Small amounts invested when you are young can go a long way for the money to compound and grow. Any child, grandchild or other young adult that receives a W-2 can make a Roth contribution based on this income.

Understanding Roth IRA Limits

The maximum Roth contribution for those under age 50 for 2020 is $6,000 or 100% of earned income, whichever amount is smaller. For example, if your child works over the summer as a pool lifeguard and earns $2,700, the maximum they can contribute is $2,700, not $6,000. There is no age restriction, so this can be done for teenagers with a summer income.

There are two ways to confirm income to be sure you do not exceed the limit if you made under $6,000. Because you have until the tax filing deadline to contribute, you can wait until you have the W-2 tax document to determine the eligible income listed in box 1. This contribution would be made for the previous year. For 2020, the tax deadline has been delayed until July 15th, so you still may have time to open and contribute to a Roth for 2019!

For the current year, you can look at the wage statement to determine year-to-date income. You will want to look at federal income less any tax-deferred amounts to get a head start on your Roth contributions for the current year.

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.

Roth IRAs and Gifts

A final point to remember is the rules for gifts. You can give up to $15,000 in 2020 to any number of people, without being required to file a gift tax return or pay any gift taxes. This could only be an issue if you were giving beyond the Roth IRA gift amount to one person.

Adult children living on their own may also qualify for the Retirement Savings Contribution Credit, if a contribution is made to their Roth IRA or any retirement account. This credit may allow them to get a tax credit for up to half of what you contribute to their Roth IRA. The maximum credit is $1,000 if you are single and $2,000 if married. They cannot be claimed as a dependent on anyone else’s tax return, they cannot be a full-time student and their income must be within guidelines to qualify. You can view the income threshold at this link: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

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