 |
|
|
 |
HIRE YOUR CHILDREN & SAVE Hiring your teenage children to work in your business can give your kids valuable employment experience, and teach them to handle responsibility. And, if you can persuade your youngsters to deposit at least part of the money they earn in a Roth Individual Retirement Account (IRA), it can even give them a head start in saving for their future needs. Although it is a retirement account, a Roth IRA can be opened at any age by anyone with earned income below $110,000 for single filers, and $160,000 for joint filers. Contributions to a Roth IRA are nondeductible, but earnings within the account accumulate tax free, and qualifying distributions are also tax free. Because they seldom make enough to owe tax on their income, children are usually better off with a Roth IRA than a tax-deferred traditional IRA. In 2005, your child is allowed contribute $4,000 (or earned income, whichever is less) to a Roth IRA. This contribution limit applies until 2008, when up to $5,000 may be deposited in a Roth IRA. Thereafter, the contribution limit will increase for inflation in $500 increments. The reward for getting an early start on saving for retirement can be substantial. Suppose your 15-year-old daughter were to use $1,000 she earned to purchase a Roth IRA. If she makes no additional contributions and the funds grow 8% annually, she will be able to withdraw over $50,000 tax free at age 65. Or suppose your son opens a Roth IRA when he is 15 years old, and contributes $2,000 for 10 years. The estimated value of his tax-free fund balance at age 65 will exceed $700,000, if the annual growth rate is 8%. A Roth IRA offers the greatest gains if the account is left untouched until the holder the reaches the age of 59½, when money can be withdrawn tax free. The IRS does, however, permit penalty-free Roth IRA withdrawals to pay for education or a first-time home purchase, though taxes will be levied on some types of early withdrawals. Before you rush to open a Roth IRA for your son or daughter, there are a few issues you should consider. Bear in mind that you cannot stop your child from withdrawing money from the account whenever he or she wants after the child reaches the age of majority, which is 18 in most states. If you are uncertain about your youngster’s ability to manage money, opening an account in his or her name may not be the best choice. You should also be aware that the only type of income that can be sheltered tax free in a Roth IRA is taxable compensation income. In general, paying your children for doing chores around the house does not qualify as compensation income, as this is an intrafamily transaction that is not usually reported to the IRS. As a business owner, however, you are permitted to hire your minor children to do certain jobs. Provided you pay your children a fair market wage for the services they perform, the money they earn would be considered compensation income and could be invested in a Roth IRA. It is essential to keep careful records of how the money placed in a Roth IRA was earned, even if a teenager’s working arrangements were informal, and he or she did not earn enough to owe income tax. Severe penalties could apply if the IRS determines that the funds deposited in a Roth IRA were not matched by compensation income. Your toughest task may lie in convincing your adolescents to save, rather than spend, their earnings. The good news is that, even if your teenager goes out and blows his paychecks on a new cell phone and skateboard, the opportunity for tax-advantaged saving is not lost. If, for example, your son earned $2,500 over the course of the summer but spent the money, you could still contribute the amount equivalent to his taxable earnings into a Roth IRA on his behalf. << Back |
 |
|
| Advertising Information | Advertising Partners | About Us | Contact Us | Affiliate Program | Terms & Conditions | Privacy Policy | Links | Accountant |
|
| ©2000-2010 CPAdirect Marketing, Inc. All rights reserved. |
|