How it Works

• By setting up this type of account, you will work with your child to fund the account with after-tax money. The money can then be invested in various securities like stocks, bonds and mutual funds. Once you invest the money, the earnings that it brings in are not taxed. This allows your account to continue compounding over the years. Then, when your child reaches the age of 59 1/2, he can take money out of the account without paying any taxes on it.
  
  

Funding the Account

• While you can set up a Roth IRA for your child, you have to make sure that it is funded correctly. The money that goes into the Roth IRA has to be equal to or less than the amount that your child earned for the year. This means that your child has to have some kind of earnings before he can contribute to the account. The money that goes into the account does not necessarily have to be from his earnings, but his earnings set the limit for the annual contribution.
  
  

Early Access

• One of the advantages of setting up a Roth IRA for your child is that it allows him to access some of the money early if necessary. With a Roth IRA, you can always take out money that you have put into the account. Since you have already pay taxes on the money, you do not have to worry about paying taxes when you take it out. This can provide your child with a source of emergency funds in case it is needed.
  
  

Tax Benefits

• By setting up a Roth IRA for your child, you could potentially pay him for work that he does for your business. You can pay your son and then give him a W-2 at the end of the year with the amount of money that he earned on it. You can fund the Roth IRA with the money and your son will likely not have to pay taxes on the money because his income is under the standard deduction. This means that the money in the Roth IRA may never be taxed.