My 17-year-old grandson wants to open a Roth IRA with money he has earned mowing the neighbor's grass, shoveling snow, walkingthe dog, etc. Because he is paid in cash, how can he prove he has legitimately earned the money?
Don't worry. Your grandson doesn't have to have a W-2 to justify opening an IRA. After all, most kids don't get formal documents for doing informal jobs for neighbors. It would be nice -- in the highly unlikely even that the IRS ever asks about this income -- if he had a contemporaneous log of the jobs and how much he made from each one. If he didn't keep such records, suggest that he prepare such a document now. He needs to know how much he made because the IRA contribution can't exceed his earnings (or $4,000, whichever is less). Your grandson can make a Roth contribution even if he's not required to file a tax return for 2006. Roth contributions aren't reported on the return.
He doesn't actually have to contribute his own money; you or his parents can help. The key is that the contribution can't be more than the earned income limit.
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.
The big payoff comes in the future. If your grandson invests $1,000 in a Roth IRA when he's 17, that money will grow to about $47,000 by the time he's 67, if the investments return 8% per year -- which is well below the long-term average return for stocks. That's just from the original $1,000 investment, and the money is tax-free in retirement because it's in a Roth.
If you start your grandson in the saving habit and he continues to contribute $1,000 every year, he will amass more than $600,000 in his Roth by age 67 -- just by contributing about $83 every month.
If he needs money before then, he can withdraw the contributions without a penalty at any time and can withdraw up to $10,000 tax-free and penalty-free for a first home.
He still has until April 16, 2007, to open a Roth IRA based on his 2006 income and can contribute to a 2007 Roth anytime now, too.
For more information about opening a Roth for a child, including a list of fund companies and brokerage firms that will open Roth IRAs for children, see Roth Rules for Kids.
-
The Big CPA Shortage Problem in AccountingCareer This once resilient accounting industry is cracking, as the labor force seems in dire straits. It’s also affecting the IRS.
-
Roth IRA Contribution Limits for 2024 and 2025Roth IRAs Roth IRA contribution limits have gone up. Here's what you need to know.
-
You May Have to Put Catch-Up Contributions in a Roth 401(k): That's Not a Bad IdeaRoth 401(k) High earners will be required to put their catch-up contributions in a Roth 401(k).
-
Five Tax Breaks for Paying Your Student LoanTax Letter After a three-year pause, student loan payments have resumed, putting a dent in people's wallets. But there are some tax breaks that can help.
-
The 10-Year Rule for Inherited IRAsKiplinger Tax Letter The IRS’ interpretation of the 10-year clean-out rule on inherited IRAs can be complicated.
-
Pay Your Tax Debts if You Want to Keep Your Passport: Kiplinger Tax LetterTax Letter Are you applying for or renewing a passport? Be sure you’ve paid your federal taxes.
-
Tax Scam: IRS Warns Taxpayers Against Filing False W-2 InfoScams A new tax scam on social media advises lying on your W-2 to falsely claim credits and bigger refunds.
-
529 Plans Get a Boost With Tax-Free Rollovers to Roth IRAsThanks to the SECURE 2.0 Act, you're now able to roll over funds from your 529 into a Roth IRA, as long as certain conditions are met.
