top of page

Welcome and thank you for stopping by. Our blog sets the heading to separate financial fiction from financial fact to help keep you afloat and stay the course. 

Signup below to get the latest Financial Forecast delivered straight to your inbox.

Note: We hate spam and will never share your information with a third party.

Writer's pictureJames Spicuzza

Starting a Roth IRA in Tampa Bay for a Child or Grandchild

This early financial decision could prove profoundly positive over time.

Roth IRA in Tampa Bay for a Child or Grandchild | James Spicuzza | Trust Group Financial

Do you have a child or grandchild earning some income? Indirectly, that after-school or summer job might present a savings opportunity for that teenager. You could help your child or grandchild save for future goals by assisting them to create and fund a Roth IRA.


So many people wish they had begun saving for retirement sooner. Imagine how your child or grandchild’s prospects for building lifetime retirement savings might improve by starting as soon as possible.


Here is a little math to illustrate the potential. Suppose $1,000 goes into a Roth IRA when a child is 17, with $100 per month going into the account thereafter. Suppose the IRA compounds annually and returns 7% a year. After 45 years of saving and investing just $100 a month with a $1,000 lump sum to start, that IRA contains $363,902 when they turn 62. From very little investment effort, a considerable sum might arise over time – and in reality, that sum might grow to be much greater than these calculations suggest, because when that young adult grows older, he or she may contribute much more than the equivalent of $100 a month to the IRA.1


The basic rules for creating a custodial Roth IRA for a minor are simple. The child must have earned income. The yearly IRA contribution cannot exceed the child’s yearly earnings. (If the child has earned more than the yearly contribution limit for the Roth IRA, the maximum may be contributed. The maximum contribution for 2018 is $5,500.) You can give the child the money to contribute, if you prefer.2


Some fine print must be understood, though. The income must have been earned in connection with a legitimate business activity – it cannot be paid out in exchange for household chores. (Income earned as an independent contractor is acceptable.) The business involved must define the child worker as an employee for federal tax purposes. Also, the income that the child earns must be reasonable in view of the job performed or the services rendered.2,3


The potential tax advantages of a Roth IRA are profound. Earnings in a Roth IRA grow, tax free, and they may be withdrawn without being taxed once the IRA owner is age 59½ and has owned the IRA for five years. If your teen invests steadily and minds Internal Revenue Service rules, he or she could retire with a tax-free retirement fund that might be six or seven figures large. Even a 25-year-old who contributes $5,000 a year to a Roth IRA earning 8% for 40 years is positioned to have about $1.4 million at age 65, and all of it may be withdrawn, tax free, if I.R.S. rules are followed.4


You may also realize a tax perk. If you make the initial contribution to the Roth IRA as a parent or grandparent, that money can count as a gift within your $15,000 yearly gift tax exclusion ($30,000 for a married couple).5


Later in that child’s life, the Roth IRA assets may be useful in multiple ways. Did you know up to 100% of Roth IRA contributions may be withdrawn by a Roth IRA owner at any age, without any tax penalty? While reducing a retirement account balance is never ideal because it hurts compounding, this option does offer a young IRA owner a potential financial resource in an emergency. Earnings withdrawn prematurely will usually be taxed, and likely also hit with a 10% I.R.S. penalty, but there is a notable exception. Did you know up to $10,000 of earnings can be taken out of a Roth IRA, tax free, at any time if the money is used to buy a first home? The I.R.S. even waives its 10% early withdrawal penalty in that case. If your child or grandchild becomes a parent, some of those Roth IRA assets might later be used to pay college tuition.4


A Roth IRA might give your child or grandchild a chance at a great financial start. Start the conversation today and see how we can help.


Roth IRA in Tampa Bay for a Child or Grandchild | James Spicuzza | Trust Group Financial

James Spicuzza is an estate and retirement income planner serving Palm Harbor, Florida since 2006. If you have any questions, James may be reached at 727.939.9465 or by e-mail. Learn more about James Spicuzza.

 

Citations.

1- investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator [8/1/18]

2- kiplinger.com/article/retirement/T046-C001-S003-helping-young-workers-open-a-roth-ira.html [3/26/18]

3- forbes.com/sites/greatspeculations/2018/03/13/what-you-need-to-know-before-establishing-a-roth-ira-for-your-kids/ [3/13/18]

4- kiplinger.com/article/retirement/T046-C006-S001-why-you-need-a-roth-ira.html [7/30/18]

5- rtacpa.com/blog/consider-this-savings-opportunity-if-a-child-or-grandchild-has-a-summer-job [7/30/18]


Featured Posts
Recent Posts
Archive
Search By Categories
Follow Us
  • Facebook Basic Square
  • YouTube - The Trust Group Financial Services
  • Twitter Basic Square
  • LinkedIn Social Icon
Planning for Retirement?
Download our Complimentary Guide, "10 Steps to a SUCCESSFUL RETIREMENT."
Successful Retirement Guide | James Spicuzza | Trust Group Financial
bottom of page