Roth IRAs for Kids: First, make that money

Susan Allen, senior manager for tax practice and ethics at the American Institute of Certified Public Accountants, said she opened a Roth at the age of 16, with encouragement from her father; she matched some of what she earned by working in retail and teaching ballet.

“I have every intention of doing this with my children as well, when they have earned an income,” he said.

To help things go smoothly, keep documents proving the contribution was valid in the event of a tax audit, financial planners recommend. A child who receives a salary will receive a W-2 form showing the earnings. If the money comes from self-employment, it is smart to keep detailed records, noting the date, the service provided, and the amount paid (such as “June 18, babysitting for the Smiths, $ 50”).

It might be helpful for the child to file a tax return, Mr. Slott said, even if the income falls below the federal filing threshold. The return will document the income earned, he said, and can help track contributions. Unlike contributions to a traditional IRA, contributions a Roth IRA (but no earnings) can be withdrawn at any time, for any reason, without penalty, he said.

And note: A child earning more than $ 400 in self-employment income after expenses may still need to file a tax return; consult a tax professional.

Most kids won’t make a lot of money, but even a small amount can start the account, and early savings can make a big difference over time. According to a hypothetical example by Fidelity, someone who contributes $ 3,000 per year to a Roth between the ages of 15 and 20, and then contributes the maximum allowable amount per year up to age 70, could accumulate more than $ 3 million, assuming an annualized return of 7%. The same person from the age of 20 would accumulate about one million less.

Roths also offer flexibility. In general, to avoid taxes and penalties, an account holder cannot withdraw earnings before the age of 59 and a half, and the Roth must have been open for at least five years. but there are exceptions for early withdrawals for certain reasons, such as a down payment on the expenses of the first home or university.

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