Dear Clients and Friends:

FUNDING A ROTH IRA FOR A MINOR

With the arrival of the new Roth IRA we now have available a new twist to helping establish a strong wealth building tool for a minor child or a grandchild

For many years articles have been written about the use of IRAs funded at very young ages and the vast amounts of wealth they can accumulate until a child retires in 50 years if funded at age 15. If a child has a summer job at the age of 15 and if the child earns over $2,000 the child has the tax ability to contribute up to the maximum amount earned or $2,000 which ever is lower to an IRA. That amount being the same in this case is $2,000. Unfortunately the child always has several other projects which will consume a summers earnings. A parent or grandparent can make a gift to this child of $2,000 and they can use it to set up an IRA. This contribution if allowed to accumulate tax-free at 15% when the person retires will accumulate to $2,492,412.

Now lets see what the twist is that the Roth IRA brings to the formula. The down side of the Roth is that the contribution of $2,000 is not deductible to the child. However the child will not have any tax on this earned income at all if that is all the child earns. And the good news is the accumulated wealth is not taxable to the taxpayer when withdrawn at the age of 65.

Another advantage is the Roth IRA contribution of $2,000 left to accumulate at the same 15% for just 10 years will grow to $9,305. Then the 25-year-old young adult who needs money to acquire a house can withdraw the entire balance without tax or penalty as it meets one of the early withdrawal exceptions. If a taxpayer has a Roth IRA account which has been in place for at least five years and withdraws money to purchase his or her first home, the entire withdrawal is tax free and not subject to the early withdrawal penalty of 10% which normally applies. Other similar exceptions include, among others, funding a higher education, disability and death.

If a child has had a conventional IRA set up for him or her this account can also be converted to a Roth IRA at any time.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner