Investment Updates

Have Your Child Kick Into A Roth With A Reward To Boot

Published Monday, January 12, 2015 at: 7:00 AM EST

Suppose your teenage child lines up an after-school job and is raking in the money. Your progeny might have an eye on the latest X-Box or iPhone, but there are plenty of other ways to spend that hard-earned cash.

Crazy as it might sound, you could encourage your child to deposit some of the funds in a Roth IRA.

Why would a high school student contribute to a Roth? This is a good time to teach your child about the benefits of tax-advantaged accounts. If your 17-year-old puts away $5,500 each year (the current maximum) and receives a hypothetical 7% annual return, the stash will grow to a staggering $2,235,909 by the time he or she is ready to retire at age 67!

What's more, future distributions from a Roth may be 100% tax-free. Although you generally have to wait until age 59½ to qualify for this treatment, earlier distributions may be wholly or partially tax-free under certain circumstances.

Finally, if you want to take some, or all, of the sting out of the situation, you can give your teenager a cash gift for up to the amount of the Roth contribution. This is perfectly legal as long as the child has earnings from a job. Plus, there's no gift tax liability because the maximum IRA contribution is less than the $14,000 a year you can give without tax liability. Everybody wins.

This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.

An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.

Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).