Roth IRAs are retirement savings plan that offer tax-free growth. These accounts are regulated by the Internal Revenue Service, which has no age regulations for the opening of an IRA. A grandparent seeking to fund a Roth IRA is allowed as long as the grandchild has earned income.
The IRS doesn't have a minimum age requirement for an IRA owner to establish a new IRA and make annual contributions to the account. This means that a minor can have an account. Although there is no age requirement, there is an income requirement. The 2011 contribution limits to a Roth IRA is $5,000. In order for the IRA to be funded with $5,000 for a minor, the child has to have $5,000 in earned income. If the child only has $2,000, this is the maximum that can be contributed for that year. The IRS does not require the IRA funds to come directly from income; the money can come from any source, including a grandparent.
Unlike other types of gifts to minor accounts, a Roth IRA immediately becomes the minor's money. While you probably don't need to worry about a five-year old liquidating the IRA and spending it frivolously, a 17-year old may decide that the money is best suited for his first car rather than retirement. There is nothing you as the funding source or the parents of the child can do to prevent this. The money is the child's and as soon as he is old enough to legal sign a distribution form, he can legally take the assets for any reason.
Benefits of Roth for Minors
When you fund a Roth IRA for a child, you are helping him save for more than retirement. Roth IRAs can be used for college, creating a tax-free income source for school tuition, books, fees and boarding. The Roth IRA owner may also access $10,000 to buy his first home. While a Roth IRA requires the owner to hold the IRA for at least five years and until age 59 1/2 to avoid taxes and penalties on the earnings, the school and home exceptions have penalties waived.
As a grandparent, you get more than the satisfaction of helping prepare your grandchild financially for life when you contribute to a Roth IRA on his behalf. You also are allowed to include the amount contributed as part of your annual gift exclusions; you are allowed to give an heir $13,000 per year reducing the value of your estate. Not only does your grandchild get the benefit of tax-free growth, you can effectively reduce the size of your estate over time. Speak with an estate planner or tax adviser to determine the best plan for your gifting and estate transfer needs.
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