PUT YOUR CHILD’S SUMMER EARNINGS TO WORK WITH A ROTH IRA

This year, there are a lot of jobs for teens, so now is a great time to think about opening a Roth IRA for your minor child. What you need to know is listed below.

What is an IRA Roth?

A Roth IRA is a type of IRA that lets you put money into it after you’ve paid taxes instead of before, like with your own IRA or your employer’s 401(k) (k). Even though a regular IRA and a Roth IRA are similar in a lot of ways, the account needs to be set up as a Roth IRA.

The same rules that apply to a traditional IRA also apply to a Roth IRA, with the following exceptions:

You can’t get a tax break for the money you put into a Roth IRA. If you meet the requirements, you don’t have to pay taxes on qualified distributions. From 2020 on, you can make regular contributions to a traditional or Roth IRA at any age. As long as you live, you can leave money in your Roth IRA. When the account or annuity is set up, it must be marked as a Roth IRA. Roth IRAs for young people Usually, a person under 18 cannot open a brokerage account in their own name. Because of this, it needs to be looked after by an adult. A Roth IRA for minors is also called a Roth IRA for Kids or a custodial account Roth IRA. No matter what name it goes by, it has the same benefits as a normal Roth IRA.

How it works is as follows:

The guardian opens the Roth IRA for the minor child and stays in charge of it. The custodian is also in charge of making decisions about contributions, investments, and distributions. He or she also gets account statements.

Parents should remember that even though they are in charge of the account and keep it in good shape, it belongs to the minor child. So, the money in the account must be used to help the child. Usually, when a minor turn 18 or 21, depending on the state, assets must be moved to a new account in their name.

earning money. A minor can only put money into a Roth IRA if they have earned money from a summer or after-school job or from self-employment like babysitting, pet sitting, or mowing lawns. As a reminder, Medicare and Social Security taxes may be taken out of self-employment earnings of $400 or more.

Most teens won’t have to file a tax return, but they should keep a written record of how many hours they worked in case the IRS needs to talk to them about something in the future.

Contributions. The most you can put into a Roth IRA in 2022 is the lesser of $6,000 or the child’s total earned income. For instance, if your child earns $3,000 this year, the most you can put into the account is $3,000, not $6,000. Parents can put money in their child’s account as long as the total amount put in by the child and the parent doesn’t go over how much the child earned this year. Using the above example, if the child earned $3,000 but only wanted to put $1,500 into their Roth IRA, the parent could put in an extra $1,500.

You don’t have to wait until you’re 59 1/2 to take out your contributions and pay taxes on them. You can do this at any time. Even if your child only puts in one dollar today, the earlier they start saving, the more time their money has to grow.

Questions About Roth IRA Accounts Held in Trust?

Your teen might not see the point of putting money in a retirement account right now, but they will thank you for it in the future. Don’t be afraid to call the office if you have questions about Roth IRAs for minors.

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Glendale

Tetyana Ser-Manukyan | Glendale Location Manager

Tetyana is a 2nd generation accountant and the Founder of Integrity Accounting Solutions, Inc. She is a meticulously organized and detail-oriented professional with over 23 years of experience in accounting industry.

Long Beach

Marilyn Motsenbocker | Long Beach Location Manager

With more than 35 years of experience in accounting and finance, her managerial expertise and knowledge add value to our firm and complement the well-being of our customers.

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