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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Wednesday, May 10, 2006

Roth IRAs for Minors?

Traditional IRAs usually are not very useful for a minor to take part in because there is often little tax advantage. However, Roth IRA for a minor can be very useful. There's no minimum age to set up a Roth IRA, and many IRA providers will accept accounts for minors, but some will not. Therefore, if you are interested in starting a Roth IRA for minor find out if the provider you want to use offers this service (go directly to mutual funds because they often allow minors to hold Roth IRAs with them).

Think compounding interest.

The child or the parent can contribute to this Roth IRA for the minor. Remember if it is in the child's Roth IRA account once the minor is no longer a minor he or she can do whatever they choose with that money.

The major impediment to Roth IRAs for children is the earned income requirement.
Your child has to have the kind of income that would call for a tax payment if the amount were large enough.
Example: Your child makes $3,000 at Wal-Mart during the summer. No tax is due on this $3,000 and the sole purpose to file an income tax return is to get a refund of possible withholding. However, the minor can invest in a Roth IRA because the earnings are taxable compensation income.

Consider the pros and cons for starting a Roth IRA for a minor. Teaching a child about finance and saving is always a great idea so they can be financially knowledgeable when they are on their own.

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