Why not open an IRA for your kids? If the kid has earned income, sock the money in a Roth and the kid's on the way to wealth.

Video Transcription

Kevin McCormally: I am Kevin McCormally of Kiplinger's. I am here with Janet Bardnor, the Deputy Editor of Kiplinger's Personal Finance Magazine. We are talking about kids and IRA. Janet it almost doesn't seem to mix that a young person would need a retirement account. Can a young person have an IRA? Janet Bardnor: A young person certainly can have an IRA as long as that young person has earned income and that's a great thing to have because it gives him or her a great head start on saving. Kevin McCormally: So if you can have an IRA should it be a traditional IRA that you get a tax reduction for or the Roth IRA that has tax free withdrawals? Janet Bardnor: I think for a kid it's definitely the Roth IRA because they are not really going to be earning enough money for the tax deduction to mean anything whereas the free income and retirement will be great. Kevin McCormally: Okay, so we are talking about earned income? Janet Bardnor: Right. Kevin McCormally: When does a child have earned -- what counts as earned income? Janet Bardnor: Well obviously any kind of a part time or summer job that a teenager have would count as earned income. Also having a babysitting job is earned income or having lawn mowing jobs that also counts as earned income. Kevin McCormally: Okay, what if you have your own business, can you hire a child to work for you and pay the money that then could go into the IRA? Janet Bardnor: You certainly can, that's really one of the clearest cut cases in which you can hire your own child. But there are couple of caveats. If you are going to hire your own child then they should be doing reasonable work, work that is age appropriate, they should be getting paid a reasonable salary and you really have to treat him like a regular employee. File all the right paper work, submit it, give them a W-2 form, the whole thing. Kevin McCormally: Okay, here is the real catch. I have got young people in my family, when they earn money they spend money, they don't have anything left to save. Can the parents actually fund the IRA account? Janet Bardnor: The parents can fund the IRA account as long as they don't exceed what the child has actually earned as earned income that year. So for example, your child earned $2000 over the summer, you can fund that account up to $2000 but not exceeding $2000. Kevin McCormally: Well, Thank you very much Janet.