For some time now, I have helped my clients determine whether they qualify for Roth IRAs and what potential benefits a Roth IRA can offer, particularly for their young children or grandchildren.
As a refresher, contributions to a Roth IRA are made with after-tax funds, and have the potential to grow tax-free over time. The account itself must be held for at least 5 years or there is a penalty for withdrawal.1 Additionally, any earnings must stay in the account until the account holder is age 59 ½ or older. There are a few exclusions (with some limitations) from the penalty such as using proceeds to pay college bills, a first-time home purchase, or to pay for certain health care expenses.
In order to participate in a Roth IRA, an individual must have earned income for the year in which they make the contribution. Obviously, many minors do not necessarily have earned income. However, as a business owner, you could hire your child to perform a legitimate job for which they are paid, therefore creating the needed earned income. Additionally, any income paid to the child could be a deductible business expense for you. Clearly, you should discuss your situation with your tax accountant or advisor prior to making any hiring decisions to fully understand the pros and cons associated with hiring your child to perform a legitimate job for reasonable compensation.
Once earned income is established for the child, a parent, or any other person can fund the child’s Roth IRA up to $6000 for 2019 (or the amount of earned income, whichever is lower).2 Imagine what 50 plus years of contributions have the potential to grow to, especially if the child continues to fund the plan as they move into adulthood. Finally, the amount accumulated could be distributed tax-free in retirement.
1 Withdrawal of earnings from a Roth IRA before age 59½ and before the account is five years old may be subject to taxes and a 10% penalty.
2 Income limits also apply to Roth IRA contributions.
This is meant for educational purposes only. You should carefully consider all your available investment options and any fees and features of each before deciding upon a course of action. This information is not intended as tax or legal advice. LPL Financial does not provide tax or legal advice. Investment return and principal value will fluctuate, and it is possible to lose money by investing.
05/19
Jordan Kerner
Financial Advisor, Waddell & Reed, Inc.
Office: 475-619-2240 | Cell: 917-301-7274 | Fax: 203-557-6262
www.jordankerner.wrfa.com | jkerner@wradvisors.com
495 Post Rd E Ste 209| Westport, CT 06880