Parents must be serious in their consideration to defending their children through assets tax planning. While life insurance and trusts should be included in every plan, Roth IRAs can be an easy tool for transferring money or assets to your child on a tax-free basis.

First of all, we require a fast review of the Roth IRA. A Roth IRA is an after-tax retirement instrument that creates huge tax savings because all tax distributions are tax-free. That statement can be a bit perplexing, but let us make it easy to understand. One side of a Roth IRA is the fact that contributions are not tax deductible as with traditional IRAs or 401(k)s. The other side of a Roth IRA, however, is that all contributions are tax-free once the person reaches the age of 59½ years. So how can one use a Roth IRA to pass money to your child?

One of the main keys to retirement preparation is “time”. The more years you use saving funds for retirement, the more you should have when that day arrives. Imagine if you had began saving for retirement when you were much younger than you are now. Think about how large your retirement portfolio would have been now if you purchased Microsoft stock in 1990 and watched it split eight times. That was an example of an opportunity you missed. Nonetheless, you can do it for your child. There are still opportunities like that now that would grow exceedingly in the future.

The primary goal of assets planning is to pass as much of your estate as possible to your children on a tax-free basis. You can transfer moderately small amounts of money to your children now. If you have a child that is a teenager with a Roth IRA, and four thousand dollars ($4,000) is contributed to that account for the child; that money ($4,000) is going to grow tax-free. When the child will turn forty five (45) years; the money will be worth so much. A ten percent (10%) return on investment would make the account grow to roughly two hundred thousand ($200,000) and the full amount would be spread tax-free. There are many other realistic advantages to opening a Roth IRA for your children.

As a parent, it is very important that you educate your children on the value of money. Opening a Roth IRA gives you the chance to make out time and educate your children the value of saving and investing, instead of playing with them. Children are generally not interested about parental guidance and instructions. But their attitudes most times will always change when it comes to money education.

Prior to opening a Roth IRA for your children, you must decide if your children are eligible to open an account. To open an account, your son or daughter should be working at least part time for an employer that reports their earnings to the IRS. Hiring your child to take out the trash each week is not going to cut it, nor will this strategy work for your 5 year-old. A lot of teenagers, however, have summer jobs that should be adequate for IRS consideration. To avoid any problem, you should check with with your tax advisor.

A more sublime matter concerns the maturity level of your children. Know it in your mind that the Roth IRA will be opened in their name. Your son or daughter will have the legal right to do what they want with the account. It is highly suggested that you explicitly explain the consequences of taking money out of the account [taxes, penalties, being cut out of the will, forced to eat healthy food, grounded for life, etc.] but the choice lies with them. As difficult as it is, parents should endeavor be to be purposeful in evaluating how your children will act in response to the realization that money is sitting in an account. If you have misgivings about this, you should probably consider other tax saving strategies.

Opening a Roth IRA for your children can be a very effective method of transferring wealth to your children and teaching them essential life lessons. If your children exercise self-discipline, your relatively little contribution to their Roth IRA can grow into a large tax-free account that will help them to live a comfortable life. But when children do not take heed to their parents and are very undisciplined in their finances, they tend to squander all the money that has been painstakingly saved for them.