How can I start an IRA for my child?
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.
Roth IRA Earned Income Options
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, see: Roth vs. Traditional IRA: Which Is Right for You?
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 think setting up an IRA for a child is a great way to help them financially for the long run AND to start teaching them about investing and savings.
As long as they have earned income - where they file a tax return and have W-2 earnings from a job or have self-employment income they can typically fund an IRA for the lesser of their earned income and $5,500 as of 2017.
The main thing is that they have Earned Income AND that they pay payroll tax. Investment income will not work. If you are self-employed or a small Business owner, you can also put the on payroll to allow them to fund an IRA (or even in your company plan if they meet the eligibility requirements).
I have two sons, both in college now, where I set up Roth IRAs for them when they started working after schol in high school. Here was my deal with them:
1) If they got a job, it could not interfere with their grades, school work or chores, and
2) If they met #1, I would fund an IRA for them up to their W-2 earned income at the end of they year with MY money, but it would be their retirement account.
I used these IRAs to teach them about investing, saving, choosing and reviewing stocks, reviewing their accounts and how the savings would benefit them over the long-run.
This worked out great for me and my sons...and it was fun as I sat down with them to discuss what stocks they wanted to buy and shared with them some of the research options. They loved it to the point where they eventually asked me to put some of their own money in the accounts.
If you or your children want to invest and choose the stocks, I would suggest that you open the IRA with a discount broker like Fidelity or Charles Schwab - this can all be done online. If you don't wan that investment responsibility, you can look into their "Robo Advisors" where they will pick investments for you.
Hope this helps.
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).
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).
This is a great question and one I am currently helping my own son with starting.
In order to be in a position to open an IRA they ned to have earned income in order to deposit funds to an IRA. My son, who is 14, has starting working this summer and we are assisting him in getting a jump start. My son plans on taking the income he earns over the summer and depositing it into his own IRA.
The key here is that he will have earned income to defer. As long as your child is old enough to work they can set up an IRA for themselves with your help. They will have to wait until they are of age if they are not old enough to work where you live.
Best of luck and congratulations on trying to instill great values.