Roth IRA may be the most thoughtful gift for a youngster

Many gifts make children happy, but those gifts are mostly for happiness now and not in the future. A gift that will keep on giving is a contribution to a retirement account in a child’s name.

A Roth IRA is one personal retirement account to consider. It can be opened for any child who is earning a wage. The contribution can be as high as $5,000 as long as the child earns that much. Parents who own a small business could employ a child under 18 up to a wage of $5,000 to make the child eligible for a contribution. However, the work must be legitimate comparable to other employees and not just in the form of adding the child to payroll without receiving any benefit from the child’s employment.

Even though it is the child’s earnings, those earnings don’t have to be put in the Roth. The parent or grandparent can make the contribution as a gift, and the child keep his or her earnings. The IRA contribution only needs to show an individual had earnings to offset.

The advantages to giving a child a gift in the form of a Roth is that the Roth grows tax-free, without requiring a minimum distribution at 70 ½ as a traditional IRA does. It also offers a penalty-free withdrawal if the child uses it for college or to buy a home. And those withdrawals are not included as income, unlike other savings gains. Higher-worth parents and grandparents also benefit because the money is removed from their estate, potentially decreasing estate tax liability. A child would also benefit through lower income taxes by putting money in a tax-free investment versus paying taxes on dividends each year in a taxable savings or investment account.

Many parents and grandparents are leery of opening accounts in a child’s name for fear the child won’t leave the money invested. But one way to avoid that is not to tell the child where the account is until the parent or grandparent approves of the withdrawal. They should inform the child it does exist as a gift and to let them know how much earnings are made to make contributions.