Your children or grandchildren may still be enjoying their Christmas or Hanukkah presents, playing with their toys and listening to the music, but there is one more present that, while it was not on any child’s list, could make them happy long after you’re gone.
If your child earned any amount of money in 2007, you can open a 2007 Roth IRA in their name anytime until April 17, 2008. Household chores don’t count, and you can only contribute as much as your child earned, (up to $4,000 in 2007), but if your child or grandchild mowed the neighbor’s lawn for $5, they can open a tax-free retirement account. Tax-free because, unlike a standard IRA, once the contribution is taxed normally, that money, and all the money you can earn with that money, is never taxed again.
While most children (and adults) are not too excited about saving for retirement, the Roth allows many early withdrawals without penalty. For example, once the Roth is 5 years old, and your child is 18, they can withdraw up to $10,000 for a first-time home purchase. In addition, the principal can be withdrawn at any time without penalty. Also, if the unthinkable happens, the Roth IRA money can be used for unusual medical expenses.
Once your child is 18 (in most states), they gain complete control of the IRA. This means they can choose to take the 10% tax penalty and withdraw all that hard-earned money to buy themselves anything they want. Of course, you don’t have to tell them about this option until they’re 28.
Guest Authors Bill Humphrey and Catherine Wynne are Principals with Entrust New Direction IRA. Reach them online at www.newdirectionira.com.
