Empower Your Teen's Future Financial Success with a Roth IRA

Marissa Poissant, CFP® April 8th, 2024

Are you looking to set up your child or grandchild for financial success? Consider how a Roth IRA could benefit you both.

Rules for Setting Up a Roth IRA

If your teen has earned income, you may be able to set up a Roth IRA on their behalf. For example, if your 15-year-old made $7,000 at a summer job, you can open an account for them and contribute up to $7,000, matching the annual contribution limit for individuals under 50. If their earnings fall below this limit, then contributions cannot exceed their total income for the year. Keep in mind that the money you contribute to their Roth IRA can also count as a gift within your $18,000 yearly gift tax exclusion ($36,000 for married couples).1

Looking Ahead to the Future

If earnings are withdrawn from a Roth IRA before age 59½, a 10% federal tax penalty may apply. However, there is a notable exception that allows up to $10,000 of investment earnings to be taken out at any time if the money is used to buy a first home. In this instance, the IRS may waive the early withdrawal penalty. If your teenager becomes a parent someday, a portion of those Roth IRA assets could also be used to pay college tuition costs for themselves or their children.2,3

Tax and penalty-free withdrawals can also be taken under other circumstances, such as the owner’s death. In order to qualify for these tax and penalty-free withdrawals, the teenager will have to meet a five-year holding requirement and withdrawals must occur after age 59½. The original Roth IRA owner is not required to take minimum annual withdrawals. Please note that this is not a replacement for real-life advice, so be sure to consult with your financial and tax professionals before modifying your Roth IRA strategy.

Greater Earning Potential

Setting up a Roth IRA for a child or a grandchild is a great way to introduce them to basic financial concepts, such as the benefits of compound interest. Providing them with exposure to such financial strategies at a young age may help them understand the value of saving for the future and instill better financial habits in adulthood.

Important Considerations

When opening a Roth IRA on behalf of a minor, it is commonly referred to as a custodial IRA. This means that you will serve as the account’s custodian until they are of age to take it over. Individual state laws determine the age threshold at which minors are able to take over management of the accounts for themselves. Working with an experienced financial or tax professional can provide guidance that helps ensure you are following all federal and state regulations.

If you are considering setting up a Roth IRA for a loved one or would like to explore other financial strategies that are available to you, please feel free to reach out.

Read More By Marissa Poissant, CFP®

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investment advisory services are offered through Concord Wealth Partners, an SEC Registered Investment Advisor.

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