IRAs

Seed a Roth IRA for Your Grandkids

Help to start building your grandchild's nest egg early.

As summer approaches, teenagers and college students are usually busy planning for summer jobs. And the income they earn gives grandparents an opportunity to help the youngsters build a nest egg by contributing to a Roth IRA on the grandkids' behalf.

Contributions to Roth IRAs give grandchildren "a huge head start," says Jennifer Failla, a certified financial planner with Strada Wealth Management, in Austin, Tex. Grandchildren can later tap the accounts for expenses such as buying a home or, ideally, use them to build tax-free retirement income.

You'll also be teaching your grandchild the value of saving from a young age, says Ajay Kaisth, principal with KAI Advisors, in Princeton Junction, N.J. For example, if you contribute $2,000 a year over four years starting when your grandchild is 15, assuming a 6% annual rate of return, the contributions will grow to more than $143,000 by the time the grandchild turns 66.

Your grandchild must have earned income to be able to contribute to a Roth IRA, and the contribution can't be more than they earned during the year, or the maximum of $5,500 (the IRS’s cap for 2017), whichever is less. You can put the money into the account for your grandchild, while the grandchild keeps his or her earnings. Here's an example: Your grandchild earns $3,500 from a summer job, but she uses it toward buying a car. If you give $3,500 to the grandchild, that money can be contributed to the Roth IRA.

Your contribution will be considered a gift to the child, so be sure to coordinate it with your other gifts for the year. Each grandparent can give a total of $14,000 per year per person without having to file a gift-tax return, or $28,000 total to one person from both grandparents, says Adam Zuercher, wealth manager at Hixon Zuercher Capital Management, in Findlay, Ohio.

You can prefund an account, but if your grandchild's job falls through or he earns less than expected, you’ll need to make sure the excess contribution and its earnings are withdrawn from the account before the next tax-filing deadline, Zuercher says.

You maintain control of the money until the grandchild turns 18 or 21, depending on the state. Then the grandchild can use it however she wishes.

Most Popular

Who Should Return Their Third Stimulus Check to the IRS?
Coronavirus and Your Money

Who Should Return Their Third Stimulus Check to the IRS?

Some people who receive a third stimulus check are required to send it back to the IRS. Others can return it voluntarily.
April 12, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Tool to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Tool to Get an Answer

The IRS has an online tool that lets you track the status of your third stimulus check.
April 4, 2021
Third Stimulus Check Calculator
Coronavirus and Your Money

Third Stimulus Check Calculator

Find out how much your third stimulus check will be using this handy tool.
April 8, 2021

Recommended

10 Questions Retirees Often Get Wrong About Taxes in Retirement
retirement

10 Questions Retirees Often Get Wrong About Taxes in Retirement

You worked hard to build your retirement nest egg. But do you know how to minimize taxes on your savings?
April 7, 2021
The 25 Best Low-Fee Mutual Funds You Can Buy
mutual funds

The 25 Best Low-Fee Mutual Funds You Can Buy

The key to building wealth long-term is buying high-quality, low-cost mutual funds run by seasoned stock pickers. Here are our favorites: The Kiplinge…
March 27, 2021
How to Report an IRA Charitable Distribution on Your Tax Return
income tax

How to Report an IRA Charitable Distribution on Your Tax Return

Your IRA administrator will send you a 1099-R, noting your entire distribution; you need to report it to Uncle Sam — and call out what portion was use…
March 23, 2021
Retirement Planning for the Self-Employed: 5 Options for Lowering Taxes and Maximizing Saving
IRAs

Retirement Planning for the Self-Employed: 5 Options for Lowering Taxes and Maximizing Saving

Being your own boss has its perks, and those include special retirement savings possibilities, such as SIMPLE IRAs, SEP IRAs and Solo 401(k)s.
March 20, 2021