The long-term benefits of tax-free accumulation provided by Roth IRAs are hard to ignore. Parents can do their children a real service by encouraging them to establish a Roth IRA at the first opportunity. A Roth IRA, left untouched until retirement, will ensure that your child has a substantial nest egg.
Take for example a youngster, age 17, who contributes $2,000 to a Roth IRA and allows that single deposit to accumulate untouched until retirement at age 65. At an 8% annual growth, the Roth IRA will have grown to $80,421.
Consider what the result would be if that same young person continued to deposit $2,000 a year to their Roth IRA. Assuming an 8% annual growth, the Roth IRA will grow to $980,264 by the time they reach retirement age of 65.
But keep in mind that children, like adults, must have “earned income” to establish a Roth IRA. Generally, earned income is income from working, not from investments. Earned income can include income from a part-time job, summer employment, baby-sitting, yard work, etc. The amount that can be contributed to either a Traditional or a Roth IRA is limited to the lesser of earned income or the annual contribution limit. The following is the annual limits by year for younger individuals. For 2016 and 2017, the contribution limit is $5,500.
Your children may balk at having to give up their earnings, especially since their focus at their age will not be on retirement. But this is not an obstacle if parents, grandparents or others are willing to fund all or part of the child’s Roth contribution.
If the parents or others contribute the funds, they need to keep in mind that once the funds are in the child’s IRA account, the funds belong to the child. The child will be free to withdraw part or all of the funds at any time. If the child withdraws funds from the Roth IRA, the child will be liable for any early withdrawal tax liability.