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Retirement Planning … For Your Children

Posted by McDonald & Osborne Posted on Oct 09 2015

Sounds crazy, doesn’t it?! Today, corporate sponsored pension plans are all but a fading memory and the future of Social Security for generations to come is uncertain. Many of us are worried about our own retirement, so why should we be focused on our children’s post-career days? If the last few years have taught us anything it is that we can no longer rely on the retirement planning options of the past. Retirement planning has been placed back in the laps of individuals. It is time to train your children to plan for their own futures and it is never too early to begin. What better way to start than by opening a Roth IRA for your child?

Contributions to Roth IRAs are non-deductible for federal income tax purposes. While the contributions are non-deductible, Roth IRAs provide for tax-free growth for retirement. What could that mean for your child? Let’s say for example that your child is 15 years old and earns at least $5,000 per year. If your child made the maximum Roth IRA contributions until the age of 70 (and assuming a 5% rate of return) their account would grow to a tax-free balance of $1,495,000.

Current contribution limits are the lesser of compensation or $5,000. So if your child has a part-time job and earns $5,000 per year they will be eligible to contribute the maximum amount to their Roth IRA. Contributions can be made any time during the year but must be made by the due date for filing the income tax return for that year (i.e., you may make contributions for 2011 until the 1040 due date of April 16, 2012).

In addition to providing for your child’s retirement, there may be planning opportunities for you as a business owner. You can employ your child and have them perform services for your company and pay them a reasonable wage. The wages paid to your child will be deductible for income tax purposes. Additionally, your child now has earned income which will allow him/her to contribute to a Roth IRA. Both of you benefit from some simple planning.

If you would like to discuss Roth IRAs in more detail please contact our office.

Vice President

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