It's Never Too Early to Save for Your Kids

For information on IRS filing requirements for children, visit IRS.gov and search for the page titled "Taxable Income for Students." Yes, the filing requirements for a child's income to qualify for a Roth contribution are an added headache come tax filing season, but it is a headache worth incurring.

The current maximum annual contribution to a Roth IRA is $5,000 ($6,000 for individuals 50 and over), but the contribution amount cannot exceed an individual's earned income in a given tax year. For example, a $500 annual contribution to a child's Roth IRA will require the child have earned income of at least $500 in the year of contribution.

As the parent of children now old enough to earn a little money, I know trying to convince a teen or preteen to turn over their earnings for a retirement account is a tall order. But there is nothing to stop Mom, Dad or another relative from funding the contribution themselves.

So my bottom line recommendation is that if you have a child old enough to earn a few bucks, consider opening a Roth IRA on their behalf and make a modest annual contribution from your own funds for a few years.

Given the child's long investment horizon, I'd invest the money entirely in a stock mutual fund, preferably a low-cost mutual fund that tracks either the total U.S. stock market index fund or the large Standard & Poor's 500 Index.

Then do everything in your power to keep Johnny or Mary from tapping into that Roth IRA prematurely to ensure they stay on the path to prosperity you've laid out for them.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.

Page
  • 1
  • |
  • 2
  • |
  • 3
Join the Discussion
You are using an outdated version of Internet Explorer. Please click here to upgrade your browser in order to comment.
blog comments powered by Disqus
 
You Might Also Like...