A Roth For Your Kid? It Works

Suppose your teenage child was fortunate enough to land a job this summer. Typically, your progeny might have an eye on the latest video game craze or a smartphone, but there may be a better way for him or her to spend the hard-earned cash.

Encourage your child to make a Roth IRA contribution. Even though retirement is a long time away, this can be a tax-smart financial move.

But how do you convince a high school student to contribute to a Roth? Explain the tax breaks. If, for example, a 17-year-old can sock away $6,000 a year (the current annual maximum) and receives a hypothetical 7% annual return, the pot will grow to a staggering $2.74 million at age 67! (Note that your child’s Roth contribution for a year cannot exceed the child’s earned income for that year.)

Under current law, future qualified distributions from a Roth account are 100% federal-income-tax-free. Although you generally must wait until age 59 ½ to qualify for tax-free distributions, earlier distributions may be wholly or partially tax free under applicable IRS ordering rules.

Finally, if you want to take some, or even all, of the sting out of the situation, give your teenager a cash gift up to the amount of the Roth contribution. For 2020, you can give the child up to $15,000 with no federal gift or estate tax consequences.