Roth IRAs are great investment vehicles for retirement. Funding a Roth IRA for yourself or your spouse is a good idea, and the younger you are when you start funding for retirement, the better off you’ll be. So why not consider funding a Roth IRA for your kids? Some may not know that this is an option, and while there are some rules about doing so, it makes a great gift for them (think the holiday season!) and it’s a good investment in their future.

 

The key here is that the child must have earned income (not investment income) from working. This doesn’t have to be from a W-2 wage paying job, it can be from babysitting or lawn mowing (though make sure you track the income for tax records); just a job the child is being paid to do. This is because a person must have earned income to fund an IRA.

 

So, if your kid has earned income and you’d like to consider funding a Roth IRA, you can contribute up to the child’s total earnings or the 2010 Roth IRA contribution limit of $5,000, whichever comes first. So if your son earns $500 doing yard work around the neighborhood, you can contribute up to $500 into a Roth IRA.

 

Your children may not understand at 14 or 15 what a difference funding a Roth IRA can have on their future (that’s money they can’t touch right now!). But as they get older and begin to understand more about how investments work, and that their retirement savings began when they were teenagers instead of in their 20s and 30s like when many people start, they will hopefully appreciate the gift you are giving.

 

However, keep in mind that a custodial Roth IRA will belong to the child you are opening for, so if you don’t want them to have access to the money when they reach the age of majority, a Roth IRA is not a good option. If that’s not a concern, investing money in this type of account for them can have a positive impact on their future financial situation.

 

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