Leverage your Child’s Summer Job to Build Their Future Nest Egg
If your child or grandchild will be working at a summer job this year,making a contribution to a Roth IRA for him or her is something to consider
The annual pay-in limit is $5,000, but not more than the child’s earnings. However, what you put in counts toward the $13,000 annual gift tax exclusion ($26,000 for couples).
The contribution can help provide a huge nest egg. A $5,000 contribution to a 16-year-old’s Roth that earns 8% each year will grow to $217,000 at age 65 and $319,000 at age 70. If the child works for a few summers and contributions are made each year, the future balance in the account will be significantly larger.
Roth IRAs are tax favored. All withdrawals after age 59 1/2 are tax free. Since contributions, but not earnings, can be pulled out tax free at any time, the child might withdraw them in the future to help when purchasing a first home.
Also, some reminders about taxes for students with summer jobs:
They can escape federal income tax withholding from their paychecks if they did not owe any tax last year and do not expect to owe any this year. Students who can be claimed as dependents can avoid income tax withholding
If tneir unearned income is $300 or less and their total income won’t exceed $5,700. But if their investment incomeis greater than $300 and total income greater than $950, withholding applies. This wouldn’t have worked for a young Warren Buffet, who was making thousands managing multiple paper routes while still a teenager, but if your kid or grandchild is more like the rest of us, perhaps this information will be useful! .
Hiring your children can lower your tax bill as well. No FICA tax is due if sole proprietors hire their kids who are under 18. The payments to the kids also reduce the parents’ income and SECA tax liabilities. Federal unemployment tax is not owed on their salaries until they turn 21.