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Give your grandchild a Roth

By Jennie L. Phipps · Bankrate.com
Tuesday, July 9, 2013
Posted: 9 am ET

If your child or grandchild has a summer job, consider helping him get started early on retirement planning by opening a Roth IRA in his name.

The maximum you can contribute is $5,500, but you can't put in any more than the child earns. There's nothing stopping you from letting the child put what he actually earns into his college fund while you make the contribution to the IRA. Children who can be claimed as dependents by their parents or someone else have effectively no tax liability, so there's no advantage to choosing a conventional IRA.

In the neatest kind of situation from the standpoint of the Internal Revenue Service, your child will receive a W-2 from his employer, but if he has a job baby sitting or mowing grass -- preferably, for someone other than you -- that can count as well. The best way to satisfy any potential questions from the IRS is to keep good records -- a notebook in which all jobs are listed, along with pay received, should suffice.

Some investment companies either don't allow minor IRAs, they have prohibitive minimums or they charge fees that will eat up any profits. Two exceptions are TD Ameritrade, which has no minimum or annual fees on IRAs, and Charles Schwab, which allows custodial accounts for minors with a minimum $100 investment and no annual or maintenance fees.

Using Bankrate.com's simple savings calculator, if you deposit $5,500 in a 16-year-old's Roth IRA and it earns 7 percent a year for 50 years, it will be worth $180,292 in tax-free savings. That's a tidy retirement nest egg and a very nice gift from the grandparents.

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