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Starting a Roth IRA for a Teen WANT TO GIVE your child or grandchild a great financial start? Consider a Roth IR A. There are many reasons why starting a Roth IR A for a teenager may be a sound financial strategy. Read on to learn more about how doing this may benefit both of you. TAX-FREE BENEFITS DURING RETIREMENT Setting up a Roth IR A for the teenager in your life could prime them to have more retirement savings. Plus, a Roth IR A has the potential to accumulate over the years, and the owner may be able to better manage their tax burden if they withdraw the money after age 59½. 1 For example, a 19-year-old who contributes $5,000 a year to a Roth IR A which earns 8% for 40 years would be positioned to have about $1.4 million by age 59. Of course, this is a hypotheti- cal example that's used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Actual results will fluctuate. 2 GREATER EARNING POTENTIAL, THANKS TO THE MAGIC OF COMPOUND INTEREST Setting up a Roth IR A for a teenager is a great way to introduce them to basic financial concepts, such as compound interest. Giving your teen a hands-on learning experience may help them understand the value of saving for the future. You might also be helping your child or grandchild to develop lifelong financial habits. 3 LOOKING AHEAD TO THE FUTURE If money is withdrawn before age 59½, there may be a penalty assessed. This is typically a 10% IRS penalty, but in some circum- stances, it can be more. There is, however, a notable exception. Up to $10,000 of earnings can be taken out of a Roth IRA at any time if the money is used to buy a first home. In this particular case, the IRS waives the early withdrawal penalty. Should your teenager become a parent someday, a portion of those Roth IRA assets might also be utilized to pay college tuition costs for them or their child. 1,4 Keep in mind that this article is for informational purposes only. It's not a replacement for real-life advice, so make sure to consult your tax, legal and accounting professionals before modifying any Roth IR A strategy. RULES FOR GIFTING A ROTH IRA Setting up a Roth IR A for a teen means that you can gift them some of the funds to get it started, provided that your teen is earning income. So, if your 15-year-old has earned $6,000 at a summer job, you can gift them up to $6,000 (the maximum annual contribution) to invest in a Roth IRA. The amount gifted or contributed cannot exceed the teen's income, however, and the annual contribution limits to a Roth IR A still apply. What's more, you may also realize a tax perk. If you make the initial contribution to the Roth IR A as a parent or grandparent, that money can count as a gift within your $15,000 yearly gift tax exclusion ($30,000 for a married couple). 5 There are a few things to consider when setting up a custodial Roth IR A. Setting up a Roth IR A for a minor is often referred to as a custodial IR A. Until the child is able to take it over, you act as the custodian of the account. Individual state laws determine when the minor child is able to take over management of the Roth IR A for themselves. 1,4 You should always consult with a tax professional to ensure that you and your minor child are following all federal and state regulations. If this is something you're considering doing for a loved one, I'd be happy to talk with you further. n Dave B. Rao is the founder of R AO Wealth Partners. He focuses his practice on helping to advise physicians, corporate executives and business owners on their unique financial situations. For more info, visit raowp.com. 1. USNews.com, Feb. 21, 2020 2. Bankrate.com, July 23, 2020 3. Forbes.com, Feb. 13, 2020 4. USNews.com, Jan. 1, 2020 5. IRS.gov, Jan. 16, 2020 Our firm does not render legal or tax advice. This article was written for our firm and provided courtesy of MarketingPro. Investments in securities and insurance products are NOT FDIC-INSURED/NOT BANK-GUAR ANTEED/MAY LOSE VALUE. Rao Wealth Partners is an independent firm. Securities offered through Cetera Advisor Networks LLC., member FINR A and SIPC. Advisory services are offered through Summit Financial Group, Inc., a registered investment adviser. Client assets held at First Clearing, LLC (a wholly owned Wells Fargo subsidiary). Summit and Cetera are affiliated are under separate ownership from any other named entity. BY DAVE B. RAO THIS E ARLY FINANCIAL DECISION COULD PROVE HELPFUL OVER TIME. 1 6❱❱❱❱❱ F I N A N C I A L C H E C K U P