Roth IRAs for Minors

The Roth Individual Retirement Account, IRA, was implemented in 1998. The two major advantages of a Roth IRA, compared to a traditional IRA, are that more people are eligible to participate and “qualified distributions” are tax free. A Roth IRA makes sense for both adults and children.

To qualify for a Roth IRA, an individual –a child or an adult– must have earned income. Earned income is typically income such as wages or self-employment income that is subject to state and federal income tax and FICA taxes. Unearned income, such as interest, dividend and capital gain income, is not used to consider allowable Roth IRA contribution amounts. The maximum amount that can be contributed to a Roth IRA for 2006 is $4,000 or an amount equal to your earned income, if it is less than $4,000.

It’s a good idea to start early building your individual retirement nest egg and to consider helping your children or grandchildren to also get one started. A huge advantage is that, at retirement, this money is all tax free. Consider starting a retirement savings for a teenager who is earning money. The money for a Roth IRA may come from anyone such as parents or grandparents. The deadline for establishing a Roth IRA for 2006 is April 15, 2007.

The money adds up. A $1,000 annual investment in a Roth IRA with a 5 percent return would be worth $51,979 in 25 years. By contributing $1,000 for 50 years the value increases to $229,464. With an 8 percent return on investment the same $1,000 per year contribution would be valued at $83,727 in 25 years and $691,000 in 50 years. Contributing the current maximum amount of $4,000 per year for 50 years, with a 5 percent return, would have a value of $917,855, and at 8 percent the worth would be $2,764,000. This is no game, you can become a millionaire.

For more information refer to IRS Publication 590, Individual Retirement Arrangements (IRAs). Consult your tax preparer to determine how a Roth IRA may affect your individual situation.