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Roth IRAs for Working Children


If you have a child who is working, you should consider opening and funding a Roth IRA for him/her. Currently, any single person who has earned income and makes less than $117,000 per year can contribute up to $5500 of earned income per year to a Roth IRA. While your children may be unlikely to fund a Roth IRA themselves, doing so for them is a gift that keeps on giving, as it will provide tax-free accumulation of wealth for decades.

Roth IRA contributions are made with after-tax money, but all deposits and earnings grow tax-free and can be taken out tax-free past age 59.5. The basis, aka the amount of actual contributions, can always be taken out tax and penalty free, which provides your child with more flexibility than a Traditional IRA.

A single $5500 contribution to a Roth IRA made for a 16 year old working a summer job would grow to over $128,000 at age 70 (assuming a 6% growth rate over the long term). Even a single deposit, if left to grow for decades, could make a difference in your child's future financial security.

There are many other advantages to a Roth IRA over other types of retirement accounts. For one, there are no required distributions at age 70.5 as with pre-tax retirement plans like Traditional IRAs and 401ks. In addition, as noted before, distributions are tax-free. Inheritors of a Roth IRA may take distributions free of income tax as well.