It is never too early to set your grandchildren up for sound financial stewardship.
Did your grandchildren have summer jobs?
Perhaps they work part-time during the school year?
According to the recent Kiplinger Retirement Report article titled “Seed a Roth IRA for Your Grandkids,” if the answer was yes to either of these questions, you can give money to a Roth IRA for them.
You will teach your grandchild the value of saving.
You can contribute on their behalf so they can keep the money they earn and use it for a car or other needed items.
Also, your grandchildren will have the beginning of a nest egg.
How can they use the money?
They could take tax-free retirement income.
They could also withdraw it before retirement when purchasing a home or some other worthy purchase.
How much can you contribute?
The amount depends on how much your grandchild earned.
In 2017, the maximum total contribution to a Roth IRA was $5,500.
If they earned less than this, then they could only contribute up to the amount actually earned.
Why is a Roth IRA a particularly good way to give money to your grandchild?
The money has the potential to grow significantly before your grandchild retires.
For example, if your grandchild is 15 and earns $2,000 over a year, then you can contribute $2,000 to a Roth.
Let us say the grandchild worked four years.
Assuming for illustration purposes a six percent interest rate, the account would grow those contributions made over four years to more than $143,000 by the time your grandchild turns 66.
Are there any other stipulations you should know about?
These contributions will count as gifts.
You will need to make sure you do not give more than $14,000 per grandchild in a year, unless done so as part of a strategic wealth transfer plan.
If you do, then remember to file a Form 709 Gift Tax.
Although you can front-load the account based on the expected income of your grandchild, you need to be aware of the actual amount he or she earned.
If he or she earns less than expected, then you will need to remove the excess from the account before the tax filing.
If you are concerned about the financial decisions your grandchild might make with the money while in high school, you may be in luck depending on state law.
You could have control of the money in the account until your grandchild turns 18 or 21.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Kiplinger Retirement Report (May 2017) “Seed a Roth IRA for Your Grandkids”