Tax Tip No. 8: Fund a Kid's Roth IRA
Give your children financial security this Christmas.

The holidays are fast approaching, and you're wondering what to get your favorite teenager. Rather than shopping for the latest trendy fashion or iPod accessory, why not consider a gift that could secure his or her future? Consider funding a Roth IRA for your child or grandchild.
For this to work, the child must have had a job in 2007 because only people with earned income can contribute to an IRA. (Investment income doesn't count.) So, if your teen made money delivering papers, babysitting, flipping burgers, or working any after-school or weekend job, he or she qualifies.
And, there's nothing in the rules that says that the child's own money has to go into the individual retirement account. It's fine with the IRS if you give your son, daughter or grandchild the cash. The key is that no more be contributed to the Roth IRA than the worker earned on a job.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
This year, individuals can put up to $4,000 into a Roth IRA. Even a small contribution now can add up to big bucks in the future thanks to the power of long-term compounding.
Let's assume you give your 15-year-old daughter $1,000 to fund a Roth IRA. If the money inside the account grows at an annual average rate of 8% -- well below the long-term average return for stocks -- that $1,000 will grow to about $47,000 over the 50 years it takes for today's teen to reach retirement age. If you added another $1,000 a year until she turned 20 -— and never added another dime -- that initial $5,000 investment would be worth nearly $250,000 by her 65th birthday. With a Roth IRA, the full amount will be tax-free when it's withdrawn in retirement.
In addition to setting your kids on the road to retirement security, the gift of a Roth IRA will help them realize more immediate goals. Since contributions are made with after-tax dollars, they can withdraw the contributions (but not earnings) any time, tax free and penalty free. And when it comes time to buy her first home, for example, she can withdraw up to $10,000 (including earnings) tax free and penalty free. It's hard to think of a better gift this holiday season.
Return to: 15 Year-End Tax Moves
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
How to Invest as the AI Industry Grows Up
Here’s where to find the winners as artificial intelligence transitions from an emerging technology to an adolescent one.
-
I’m 62 and worried about Social Security’s future. Should I take it early?
A Social Security shortfall may be coming soon. We ask financial experts for guidance.
-
Mississippi Tax-Free Weekend 2025 Is Here: What to Know Before You Shop
Tax Holiday Just in time for Prime Day, Mississippi is celebrating a tax holiday in July. Find out how you can save on back-to-school essentials.
-
Ten Cheapest Places to Live in Virginia
Property Taxes The Commonwealth of Virginia has some cheap places to live. Here are a few if you hate paying property taxes.
-
2025 SALT Cap Could Hurt Top 'Hidden Home Cost'
Tax Deductions The GOP tax bill could make hidden homeowner costs worse for you. Here’s how.
-
Retire in the Bahamas With These Three Tax Benefits
Retirement Taxes Retirement in the Bahamas may be worth considering for high-net-worth individuals who hate paying taxes on income and capital gains.
-
2025 Virginia Tax Rebate Checks Coming Soon? What to Know Now
Tax Rebates Given a historic 2025 gubernatorial race, tax policy will remain a key issue for Virginians in the months ahead.
-
Summer Backyard Ideas With Added Tax Benefits for 2025
Tax Tips Find out how these summer 2025 home projects can help you save on taxes next year.
-
Coverdell ESAs vs. 529 Plans: Which Should You Choose?
Savings Accounts These savings accounts can offer tax benefits for school and retirement expenses. Here’s how.
-
Homeschoolers Could Soon Save on Expenses With 529 Plans
Savings Accounts A new House GOP bill could change how you save for your child's homeschool education. Find out how.