If your teen has an earned income, you may be able to set up a Roth IRA for them. For example, if your 15-year-old has earned $7,000 at a summer job, you can set up an account for them up to $7,000 (the maximum annual Roth IRA contribution). The amount cannot exceed the teen\u2019s income. Keep in mind that money that you contribute to the Roth IRA can count as a gift within your $18,000 yearly gift tax exclusion ($36,000 for a married couple).1<\/sup><\/p>\n<\/div> If money is withdrawn from a Roth IRA before age 59\u00bd, a 10% federal tax penalty may apply. There is, however, a notable exception. Up to $10,000 of investment earnings can be taken out of a Roth IRA at any time if the money is used to buy a first home. In this instance, the IRS may waive the early withdrawal penalty. Should your teenager become a parent someday, a portion of those Roth IRA assets might also be utilized to pay college tuition costs for themself or their child.2,3<\/sup><\/p>\n Setting up a Roth IRA for a teenager is a great way to introduce them to basic financial concepts, such as compound interest. Giving your teen a hands-on learning experience may help them understand the value of saving for the future. You may also be facilitating the development of your children\u2019s or grandchildren\u2019s financial habits.<\/p>\n<\/div> Setting up a Roth IRA for a minor is often referred to as a custodial IRA. Until the child is able to take it over, you act as the custodian of the account. Individual state laws determine when the minor child is able to take over management of the Roth IRA for themselves. 1. Investopedia.com, January 28, 2024Looking ahead to the future<\/strong><\/h2>\n<\/div>
\nThis article is for informational purposes only. It’s not a replacement for real-life advice, so make sure to consult your tax professional before modifying any Roth IRA strategy. Tax-free and penalty-free withdrawals also can be taken under circumstances other than first-home purchases, such as the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals. To qualify for the tax-free and penalty-free withdrawal of earnings, the teenager must meet a five-year holding requirement and occur after age 59\u00bd.
\n<\/sup><\/p>\n<\/div>Greater earning potential, thanks to the magic of compound interest<\/strong><\/h2>\n<\/div>
There are a few things to consider when setting up a custodial Roth IRA<\/strong><\/h2>\n<\/div>
\nA tax professional can provide guidance that may help ensure that you and your minor child are following all federal and state regulations.<\/p>\n<\/div><\/div><\/div><\/div><\/div>
\n2. IRS.gov, 2024
\n3. IRS.gov, 2024<\/p>\n<\/div>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. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest.\u00a0FMG\u00a0Suite\u00a0is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm.\u00a0The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright