(Please note: Originally published Feb 15 2010, moved to new website 09 29 2011)
Do you have children? Do you want them to have something more than the average new toy, video game, book, <insert current fab item of your choice here>? Are they over the age of 7? Do you own your own business or do they/can they perform work for income?
If they babysit, clean yards, mow yards, make any type of income whatsoever then I would like to suggest the following as gift to give your child(ren).
Open up a ROTH IRA Account in their name.
For Birthdays, Christmas and other gift giving occasions give them 1 less item and instead put $25, $50 or $100 into their ROTH IRA account.
If they have earned income from some source (a family business, mowing lawns, babysitting, whatever) then they can own and invest into a ROTH IRA... they must have earned income tho.
You are paying taxes on the dollars you invest on their behalf. However, they are not paying taxes on their earned income (unless it is really really significant). When they retire and are ready to withdraw the money it will be much, much more than the initial investment.
Image where your retirement accounts would be if you were able to invest and let it grow for 50 years (age 15 to age 65).
$1,000 invested at age 15 and allowed to grow at 3% for 50 years will have a future value of just over $112,000.
$1,000 invested at age 15 and allowed to grow at 5% for 50 years will have a future value of just under $210,000.
$1,000 invested at age 15 and allowed to grow at 8% for 50 years will have a future value of just over $573,000.
You would not be subject to the Kiddie-Tax on their earnings as the Kiddie-Tax is for investment income (interest, dividends, etc) over a specific amount. Additionally you would not be subject to the Kiddie-Tax on the ROTH IRA earnings as these are in a retirement account that grow tax-deferred and are tax-free on withdrawal.
Also, once your child has grown older and is out on their own, you can still contribute to their ROTH IRA on their behalf provided they meet the requirements for ROTH IRA contributions that year. Most younger individuals will continue to qualify even if they have a retirement account at work.
I am not a retirement specialist and this idea may not be suitable for everyone please check with your tax adviser, legal adviser and investment professionals about your specific circumstances.
ADDENDUM
Something I just thought of and will need to investigate more concerns children that raise farm animals under FFA or 4-H programs and sell them at county livestock shows. Is the money paid to them "income". If it is then you could file a 1040 with a Schedule C (Business) (sorry 1040-EZ would not be applicable since you would be running the income through their own business). This would then provide the basis and justification for having the ROTH and the amount that could be contributed to it. If I remember correctly you are limited to $5,000 or total income whichever is less. Something to look into. Also, do you "bred" puppies or kittens for sale? If it is a side-line business why not put in the name of your children to give them some earned income. Assuming of course that they actual are feeding and raising and selling the animals. Same thing with Rabbits, Chickens, Guinea Pigs, Hamsters, etc. Easy, low cost, extra/sideline business.
ADDENDUM 09 27 2011
Here is a website that provides extensive information on ROTH IRAs. http://www.rothira.com
The only thing I do not like about the site is that under the "Compare ROTH IRA Providers" section several major providers are not listed like T Rowe Price, Fidelity and Vanguard. I only mention this because i am a firm believer that for Roth IRAs the best investment is a diversified Mutual Fund base. In using Vanguard Investment Services. you get good mutual fund selection at the lowest cost of any mutual fund provider that I have ever seen. On Average I think their fees are around 0.25%-0.35% compared to other providers that charge 0.65%, 1.0%, 1.5%. I am talking expense ratio charges and not commission, 12-b fees, redemption fees or account fees (most charge $20-25 for accounts under a specific balance after which the fee is waived). Just Mother's Two-Cents (which really aren't worth anything today).
As always, Standard Disclaimer applies.
Mother
