Each year, the news on Social Security gets worse. It’s not unusual for parents to worry about their kids’ retirement (let alone their own retirement). Parents, however, have retirement savings opportunities for their children.
“A great scenario is the case where a parent operates a business that is reported on Schedule C of their tax return and their minor child is an employee,” says Robert Steinberg, founder & CEO of Blue Chip Partners in Farmington Hills, Michigan. “The child can be paid wages and the parent is not required to withhold Social Security or Medicare. Years ago, we had a client who owned their own business and they hired their children to clean the building and do other odd jobs such as data entry.
“You can’t use a gift as earned income for this purpose,” says Rosen. “The money has to come from work. So if you’re thinking about simply writing your kid a check and then using it for a ROTH IRA, you’re out of luck.”Minor children who have started their own businesses will often find it useful to consider setting up SEP-IRAs or so-called “Solo” 401ks. This is most likely an option for enterprising teenagers. In general, however, the standard IRA represents the best way to create a Child IRA.
Even if your children have to pay taxes on their income, the benefit of deferring taxes today may not be enough to offset the advantages of withdrawing tax-free during retirement.
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