Although you may not traditionally think of setting up a Roth IRA for your children, it can be a great way to start saving for their future. The only way to set up a Roth IRA is to develop an employee and employer relationship. In order to do this, you can "hire" your children to complete chores and put their earnings into a Roth IRA. You as the parent/employer can deduct what you pay, thus reducing your own income tax, your Medicare tax and, possibly even your Social Security tax.
How to Set up a Roth IRA for your Child
First, "hire" your child. You don't have to have a business to create an employer-employee relationship. So set up a chore schedule for your child and document her responsibilities and wages. She can help out with cleaning, mowing the loan, babysitting duties and more. Instead of giving her an allowance for the chores that she completes, develop a pay scale. Calculate the earnings and provide her with a W-2 at the end of the year. NOTE: In 2006, you could pay each of your children as much as $8,450 and this rate has likely increased.
Next, you will need to have your child file a tax return. Due to the standard deduction applied, the child will not be responsible to pay any taxes on the earned income. In addition, you can claim her as a dependent on your tax return. If your children are under age 18, you don't have to pay any payroll taxes on them.
Then, put the earnings into a Roth IRA account. The benefit of a Roth IRA? Like with any Roth IRA, the earnings are tax free and the child will earn an annual return of 8 %. Companies like Charles Schwab and Fidelity are great choices for opening up IRA accounts that you can monitor on-line.
Lastly, contribute on an annual basis until the child reaches the age of 18. If you put in $4,000 each year for the 11 year span, then the Roth IRA should reach a healthy $70,000. If the money is left alone, until the child reaches retirement age, she will have access to 2.5 million dollars. And remember, best of all, the money is tax free!