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Roth IRA benefits: Teach your children well

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in Small Business Tax

Does your teenage child have a summer job? Even though the pay may be paltry, the job is a valuable life experience. Now, you can teach your child another lesson ... about tax savings.

Strategy: Give your child a cash reward for working this summer. Then, have the child deposit the gift in a Roth IRA. The maximum contribution for 2005 is $4,000 (or his or her earned income for the year if it's less than $4,000).

After five years, your child can withdraw the money tax-free to help pay for his or her first home. Or, the child can keep accumulating income and gains until he or she turns age 59 1/2.

Any distribution after age 591/2 is completely free from federal income tax no matter how much is in the account. (Pre-591/2 distributions are exempt from the usual 10 percent penalty tax if they are used to pay college tuition or first-time home-buyer expenses.)

Example: Suppose your industrious 16-year-old begins stashing away $4,000 each year in a Roth IRA earning 8 per-cent annually. When your child is age 60, he or she will have amassed an amazing $1,314,322. Even better: Your child will owe no federal income tax on the million-dollar-plus payout!

It doesn't matter that the money deposited in the Roth IRA isn't the actual money your child earned (the money came from you), just as long as it's the same amount. Doing this allows the child to use his or her summer earnings in other ways.

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