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Turning a Summer Job into a Future Nest Egg

Posted 7:55 PM by

Do you have a child or grandchild with a summer job? If so, you may want to consider contributing to a Roth IRA for him or her this year.  A contribution can be made up to the child’s annual income, not to exceed $5,000 in keeping with the 2012 Roth IRA contribution maximum (not subject to adjusted gross income phase out).

Why a Roth?  After the age of 59 1/2, all withdrawals are made tax-free, and the contributions (not earnings) can be withdrawn free of tax at any point in time.  Therefore, your contribution offers dual assistance: retirement savings or availability at any big milestone, such as a down payment on a first home.  Given the opportunity to grow, a contribution made at a young age makes a big dent in one’s retirement savings.  At a rate of 7% per year, a $5,000 contribution made to a 16 year old's Roth will grow to $136,000 by age 65.  Not too shabby for one summer's worth of work!

As a valuable side note: It is important to recognize that contributions made to a child’s Roth IRA do count toward the annual gift tax exclusion of $13,000. 

About the Author
Ali Todd is a director in KSM’s Veterinary Services Group. Ali works closely with clients to understand their challenges and provide practical solutions, whether it is tax planning or creating an action plan for enhancing profits.

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