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As a parent, it is vital that you teach your child value of money. Opening a Roth IRA gives you opportunity to sit down and teach your child value of saving and investing, instead of yelling at them to clean their room. While a parental lecture on need to save money would typically meet with glassy eyes and yawns, your child’s attitude will undoubtedly change when you are talking about their money.
Work and Maturity Issues
Before you rush out to open a Roth IRA for your child, you must determine if your child is eligible to open an account. To open an account, your son or daughter must be working at least part time for an employer that reports their wages to IRS. Hiring your child to take out trash each week is not going to cut it, nor will this strategy work for your 5 year-old. Many teenagers, however, have summer jobs that should suffice for IRS consideration. To avoid any trouble, you should consult with your tax advisor.
A more sublime issue concerns maturity level of your child. Keep in mind that Roth IRA will be opened in their name. Your son or daughter will have legal right to do what they will with account. It is strongly suggested that you clearly explain consequences of taking money out of account [taxes, penalties, being cut out of will, forced to eat healthy food, grounded for life, etc.] but decision lies with them. As difficult as it is, try to be objective in evaluating how you child will react to having money sit in an account. If you have doubts, you should probably investigate other tax saving strategies.
Opening a Roth IRA for your child can be a very effective means of leveraging your estate. If your child exercises restraint, your relatively small contribution to their Roth IRA can grow into a sizeable tax-free nest egg.
Richard Chapo is CEO of http://www.businesstaxrecovery.com - Obtaining tax refunds for small businesses by finding overlooked tax deductions and credits through a free tax return review.