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Looking for another way to save on your family’s taxes? Opening a Roth IRA may be a solution. Roth IRAs for minors, especially teenagers, are perfect because they likely have many years to let their accounts grow tax-free. In the example below, look at how much difference starting contributions early can make:
Both Ethan and Hannah contribute $5,500 per year to their Roth IRAs through age 66. But Ethan starts contributing when he gets his first job at age 16, while Hannah waits until age 23, after she’s graduated from college and started her career. Ethan’s additional $38,500 of early contributions results in a nest egg at full retirement age of 67 that’s nearly $600,000 larger!
Total contributions made
Ethan: $280,500
Hannah: $242,000
Balance at age 67
Ethan: $1,698,158
Hannah $1,098,669
Note: This example is for illustrative purposes only and isn’t a guarantee of future results. The figures presume $5,500 is contributed at the end of each year over the ages shown and a 6% rate of return.
The 2014 and 2015 annual contribution limits are the lesser of $5,500 or 100 percent of earned income, reduced by any traditional IRA contributions. Contributions aren’t deductible, but if the child earns no more than the standard deduction for singles ($6,300 for 2015) and has no unearned income, he or she will pay zero federal income tax anyway. If a child’s earned income exceeds the standard deduction, the income likely will be taxed at only 10 percent or 15 percent. So the tax-free treatment of future qualified distributions will probably be well worth the loss of any current deduction.
If your children or grandchildren don’t want to invest their hard-earned money, consider giving them the amount they’re eligible to contribute — but keep the gift tax in mind.
For more information, contact GTM’s Household Employment Experts at (888) 432-7972.
