This summer was the summer of freedom for my middle son. Armed with a bike, a bathing suit and a few bucks, he’d take off each morning and hit the corner store for rations of Pop Tarts and Jolly Ranchers on his way to see friends. This worked well for a week or so, but junk food funds quickly dried up. Cue the summer job. He was excited about the cash infusion, but mom, the CPA, was excited for a whole different reason the opportunity to talk about one of the basics of personal finance. Minors under 18 can set up a custodial Roth IRA with the help of a parent or guardian!
Unlike traditional IRAs, Roth IRAs are funded with after-tax dollars, which means that while you don’t get a tax break on contributions, your money grows tax-free, and withdrawals in retirement are also tax-free.
The maximum Roth contribution for individuals under the age of 50 in 2024 is the LESSER of $7,000 or 100% of earned income. If a minor has multiple jobs, you combine their wages to determine the maximum contribution. There is no minimum. The contributions are due by 4/15 of the following calendar year. There also is no minimum age requirement to set up a Roth as long as the child has earned the income. It is important to note that all contributions to a custodial Roth belong 100% to the child. Once the child turns age 18 or 21, depending on the state’s definition of the age of majority, they have full control over the account. Although it’s to have the actual contribution is made by the child, it can also be made by others such as parents, caregivers, grandparents, etc. The child does not need to be a dependent for a contribution to be made on their behalf. In my own experience, I split the agreed-upon contribution with my son as an incentive and to keep him involved in the investment process.
Many parents open Roth IRA accounts for their children to help them get a jump start on saving for retirement; however, in certain circumstances, the accounts can be used to support other financial goals, such as paying off student loans, assisting with wedding costs or buying a home. In general, Roth contribution amounts made with after-tax dollars can be withdrawn at any time without being subject to income taxes or penalties. Once you reach age 59 ½, provided the account has been open for 5 years, the dollar amount of growth that the account has enjoyed from being invested can be withdrawn on the account without being subject to a 10% early withdrawal penalty. There are several exceptions to this rule, such as a withdrawal of up to $10,000 (lifetime maximum) to pay for a first-time home purchase.
Have a question about helping your children use their summer cash for more than just junk food? Give us a call and let the Howland Capital team give you a hand.
