The Roth IRA is hands-down the most attractive retirement plan available for people with at least 15 or more years until retirement, since it provides tax-free withdrawals if you wait to withdraw funds until after age 59.5. The smart thing to do is to start contributions while you or your children are very young, which allows compounded growth for possibly another 30-40 years before you/they would consider using the funds in retirement. The tricky part is convincing your teenagers or young adults to start saving early and meeting the requirements of earned income to qualify for IRA contributions.
So, how can you start a Roth IRA for your teenage daughter if she doesn't have a job with earned income? One option is to hire her at home within the family business (self-employed), as a file clerk or marketing assistant, for example. In this scenario, you can benefit twofold by receiving a deduction from business income, and you can make a contribution to your child's retirement. If you're not self-employed, you can still hire your child and pay them via W-2 or 1099-MISC income for cleaning the house or doing other odd jobs around the house - just make sure you document everything carefully, and put the pay directly into the Roth IRA. Since the child is working for the parents at home, no child labor laws are in violation.
Once your child starts gainful employment outside of the home or summer work between school breaks, you can still gift an amount equal to the Roth IRA contribution to the child and deposit this amount into a Roth account for them just as long as their compensation is equal to or greater than the gift.
For additional reading, check out Roth Or Traditional IRA...Which Is The Better Choice?and Roth IRA: Back To Basics.
This question was answered by Steven Merkel
In order for an individual, minor or not, to contribute to an IRA, they need to have earned income. The definition of earned income is "income derived from active participation in a trade or business, including wages, salary, tips, commissions and bonuses." Once they have earned income, they may be eligible to open and contribute to an IRA (Roth or traditional). You can go to any number of custodians to open the IRA. Make sure to consult with your tax advisor before you pull the trigger on this because the rules surrounding IRAs are complicated.
I would recommend visiting Vanguard.com. They have an excellent selections of funds with extremely low expenses.
Please keep in mind that while anyone can open an IRA; your child needs to have earned income in order to contribute to an IRA. If your child is working, then you could contribute up to the amount they earned (capped at $5,500/year).
ABSOLUTELY! Good for you for getting the ball rolling.
The main thing to set up an IRA for a child is they have to have documented earned income (see IRS definition here). Also, the contribution limit is just like one for an adult. The contribution limit for 2016 is $5,500, but can't exceed the amount of earned income the child had (ie... if the child had earned income of $1,000, then the max contribution would be $1,000).
Most people start investing by using mutual funds. A mutual fund is a portfolio (or collection) of stocks, bonds, real estate, etc. There are a lot of mutual funds to choose from. An investor needs several different mutual funds to be “diversified.” Diversification helps reduce the risk of loss.
Where to start? Homestead is a mutual fund company in Virginia that is a great fit for investors who want to get started, but have a modest investing “budget.” Their website is http://homesteadfunds.com. They have several different mutual funds. These four mutual funds could be utilized to begin building a diversified mutual fund portfolio: Homestead Value fund (invests in large to midsize US companies), Homestead Small Company Stock fund, Homestead Short-Term Bond fund, and Homestead International Value fund (invests in non-US companies).
With their automatic investing plan, Homestead waives the normal initial investment of $500. You can literally build the four fund portfolio shown above for $12 per month ($3 each month into each fund) if you automate the monthly investment. An automatic monthly investment is where you authorize Homestead to electronically withdraw your monthly investment from your checking or savings account. There is no fee for that service. Of course, you can also invest more than $3 each month into each fund!
There are several different types of accounts to choose from as you select your mutual funds: regular investment account, individual retirement account (IRA), and Uniform Transfer to Minors Act account, or UTMA (this is the type of account a parent would set up for a child).
Regular investment accounts have fewer rules than IRA accounts, but IRA accounts offer tax protection. Remember, you are investing money in mutual funds—but you still have to choose how to establish the account (regular account or IRA account or UTMA). The most common types of IRA accounts are the traditional IRA and the Roth IRA. For most people with modest incomes, the Roth IRA is generally the most useful. If married, it’s best to set up separate IRA accounts to maximize the amount you can invest. There is a $15 per year account maintenance fee if setting up an IRA account, so if you plan to invest a small amount of money, you may want to only invest in one Homestead mutual fund rather than four. Regular (non-IRA) investment accounts don’t charge the $15 per year account maintenance fee.
The most important aspect of investing is simply starting! Don’t wait until you have a lot of money, start small now. And don’t attempt to find the perfect mutual fund, simply build a sensible portfolio using several different mutual funds. As your income grows, you will be able to invest more. What starts out, for example, as a $12 per month investment will grow over time as your income grows. Be patient. Have reasonable expectations. Don’t panic if your accounts temporarily lose money. Mutual funds that invest in stocks tend to have positive yearly returns about 70% of the time.
For those wanting to build a more diversified portfolio, you might consider a multi-asset portfolio that utilizes 12 mutual funds or ETFs (exchange traded funds). Each fund is given an equal allocation of 8.33%. A 12-asset portfolio been “pre-built” and is available at Motif Investing for a $250 minimum investment. https://www.motifinvesting.com/motifs/7twelve-core-portfolio.