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How Parents & Grandparents Can Help Fund A Child IRA

Congratulations! Your child has a job!

What now?

How about an IRA for a child? Your child won’t think about this, but you should. It doesn’t matter if it’s a job a full – fledged summer business that produces 1099 or just a small gig to help with a neighbor’s business.

You may not think this is a top priority, but according to experienced financial professionals, it should be.

“In many of our workshops, presentations, and seminars, we question audiences and ask them if they learned to save and get a few answers in their youth,” says Jill Gleba, founder and president of Gleba & Associates in Troy, Michigan. “When we ask if they have learned how to invest, we are lucky that one person answers yes. That’s sad. “

Why could that be the case? First, children cannot set up an IRA for children. They must not enter into the agreements necessary for its establishment. Usually a parent (or grandparent) has to take the lead.

“An adult, who is defined for this purpose as a person over the age of 18 in most states, must be the one to open a‘ custodial IRA ’account,” says Jason Dall’Acqua, president of Crest Wealth Advisors in Annapolis, Maryland. “This person is usually the parent of the child and is called the custodian of the account. All money in the account belongs to the child, but the property is managed by a guardian until the child reaches the age of majority, which is either 18 or 21 years, depending on the state. “

So, the first step in helping a child fund a Child IRA is setting up. This vehicle, basically the same as the IRA, but with a twist, is not always on the menu, so you will have to ask your dealer if he has a Child IRA (which they may call a “Small IRA” or a “Custody IRA”).

“Since not every brokerage house or bank will offer custody IRA accounts, you may need to check with various service providers to find the one that offers it,” says Tiffany Lam-Balfour, an investment and retirement specialist at NerdWallet in San Francisco. “For example, Fidelity and Charles Schwab offer custodial IRAs.”

Once you set up an IRA for a child, someone has to fund it.

Notice the word “someone.” Money should not come from a child.

“Parents and grandparents can fund an IRA on behalf of a child, as long as the amount does not exceed the child’s income for that year,” says Dominic Trupiano, vice president of sales and marketing at Artesys (RT Jones Capital Equities Mgmt, Inc.), based in St . Louis. “Please note, the usual gift tax rules apply.”

There are two key points here. First, no matter who contributes, you cannot give more than what the child has earned. Second, there may be other tax implications for the contributor, but nothing to worry about.

“Anyone can contribute to a child’s IRA as long as it does not exceed the child’s income for the year the contribution is made,” says Jazmin Gabriela Carpenter, vice president, Investments at Wedbush Securities in Los Angeles. “For example, Ella earned $ 2,500.00 from a dog that sat / walked during the summer. I can let Ella spend her $ 2,500.00 however she chooses, and I can contribute $ 2,500.00 to her child IRA from my own money. Important Note: I would not receive a tax deduction from contributing to Ella’s IRA. Ella would get a tax benefit. ”

If more family members want to jump in, it is best if it is coordinated through a primary adult (i.e., the one who initially set up the IRA for the child).

“The custodian of the account, usually the parent, should make contributions to the account on behalf of the child,” says Dall’Acqua. “It is important to understand that the child had to earn income in order to receive contributions to the account. Contributions may not exceed the child’s lower income or the maximum allowable IRA contribution for that year. Grandparents can make a deposit to the account. However, due to limited contributions, it is best for the caregiver to make contributions so that one person monitors the total contributions. In this case, the grandparents can give a gift to the child, and the guardian (probably the parent) can make a contribution on behalf of the child. “

In fact, you can use this benefit as a way to encourage your child to get a job. Imagine that it is similar to a company match in the amount of 401,000, and you play the role of a company.

“A parent or grandparent can decide whether to stimulate a young saver as an employer could,” says Christie Whitney, vice president of the Investment Council and director of rebalance planning in Palo Alto, California. “Let’s say you choose a match with every dollar your child saves or something more generous. It doesn’t matter where the contributions come from. It is important that the young earner actually earned the amount that ends up in his account. ”

But wait! There is more!

Here’s something you’ll need to talk to your accountant about, but if you own a small business (either full-time or a side concert) that’s organized in a certain way, you can help create a 100 percent non-taxable retirement savings fund for your child.

“Parents who own a business (self-owned or a partnership in which each partner is the child’s parent) can also employ their minor children as employees without paying Medicare, Social Security and federal unemployment taxes,” says Lam-Balfour. “By doing so, your child can contribute to the Roth IRA and the parent company earns a job tax deduction. You will need to issue a W-2 to your child and salaries must be justified, but this can be a worthwhile endeavor, depending on your circumstances. ”

Getting a child to save early for retirement through the Child IRA brings dividends far above the accumulated dollars. It shows the child the reward for complex growth and the importance of constant financial discipline. And for some parents who have their own business, it can be a way to pass on wealth to the next generation without taxes.