Roth retirement accounts could bode well for kids

04/06/2012 5:00 AM

05/16/2014 6:21 PM

How’s this for a sweet deal: Your son or daughter can plow the money earned last year from mowing lawns, flipping burgers or baby-sitting into a nest egg for the future.

And while it won’t rival the Mega Millions lottery, the money may turn into a sizeable stash when it’s withdrawn decades from now.

Those are among the benefits of Roth Individual Retirement Accounts. Anyone, including children, is eligible to contribute to a Roth with one caveat — they must have earned income from a job.

That means the chores around the house that junior performed for you or the grandparents last year are not likely to qualify as “earned” income by Internal Revenue Service standards.

With the mad scramble to file your taxes before this year’s April 17 deadline, don’t overlook this powerful long-term investment tool for your children.

Your child is allowed to contribute the amount of income earned by last year, up to a $5,000 maximum.

Earnings and contributions can be withdrawn tax-free years from now if you follow the rules.

At first glance, opening a retirement account for your kids might be the least of your financial priorities. After all, every penny your 14-year-old earned mowing yards last summer needs to be saved for college, right? And there are the cost-of-living expenses that typically come out of the 16-year-old’s summer pay — movies, pizzas and perhaps saving for a car.

When it’s all said and done, there’s little left for the Roth.

I’ve heard those arguments chapter and verse whenever I’ve written about Roths for kids.

But here are some of the advantages of contributing to a Roth —it can help your child develop the habit of putting money aside for the long term where the funds will have time to grow. And given the debatable future of Social Security, shouldn’t we be encouraging financial self-reliance?

If funds are tight, consider setting aside just a portion of grocery-bagging money for long-term investing. This doesn’t have to be all or nothing.

Not every investment firm, mutual fund company or bank will open Roths for minors through custodial accounts. Here’s a sampling of what you’ll find:

•  The Monetta Young Investor Fund will open new Roth IRAs with a $100 initial minimum deposit, along with a $25 monthly automatic investment plan. Young savers can also take advantage of Monetta’s stock market educational materials.

• Charles Schwab lets you open a Roth with $100. There are no monthly service fees.

• TD Ameritrade has no minimum initial investment and no annual fees.

• American Century Investments allows Roth accounts in its Livestrong and One Choice asset allocation funds for a $500 minimum and then $100 a month.

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