MY PARENTS WANT TO MAKE A GIFT TO MY CHILD

You recently did a post about hiring a child for summer work. My son works and my parents want to make a gift to my son. I think I remember you saying that there is a way to do this that would give us some tax advantage?

Alice

Here’s an idea. I don't know how much your parents are talking about giving your son but you could consider making a contribution to a Roth IRA for him this year. The annual payin limit is $5,000, but not more than the child’s earnings.

If your parents are very generous they must realize that the $5,000 counts toward the $13,000 annual gift exclusion ($26,000 for couples).

The payin can help provide a nice nest egg for the child. For example, a 16-year-old with $5,000 in a Roth IRA that earns 7% each year will have $137,000 at age 65 and $193,000 at age 70. If the child works for a few summers and the contributions are made each year, the future balance in the Roth account will be much larger.

Roth IRAs are tax favored, too. All withdrawals after 59½ are tax free. And since contributions, but not earnings, can be pulled out tax free at any time, the child can withdraw them in the future to help when buying a first home.

Larry Kopsa CPA