09 Jun A retirement head start for grandkids

 Q. I don’t need my required minimum distributions from my IRA and I’ve heard you can start IRAs for kids. How can I open IRA accounts for my grandchildren?

A. Helping the younger set get started with retirement savings is a terrific idea.

It can help set them on a path to create real wealth in the future.

“It may encourage them to allocate a portion of their earnings in the future,” said Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield. “It may add up to significant savings at retirement and it may provide the opportunity to teach them about stocks, bonds, mutual funds – the basics of investing.”

To go the IRA route, whether a traditional IRA or a Roth, you’ll have to follow some rules.

The account owner, or in this case, your grandchildren, must have earned income for the year, said Alison Williams, a certified financial planner with Stonegate Wealth Management in Oakland.

“Although they may be too young to receive a W-2 from a formal employer, money earned from jobs such as babysitting, raking leaves, or shoveling out the neighbors driveways does qualify,” she said. “To prove this, the minor will need a documented record of earnings.”

In the case of a family business, the IRS will need proof compensation was fair and the minor’s work was relevant to the business, she said.

If the child has earnings, you’re good to go.

In 2015, the contribution limit is the lesser of earned income for the year, or $5,500, Gobo said.

“If the child is a minor — under 18 in most states, under 19 and 21 in others — you can set up a custodial IRA,” Gobo said. “As the custodian, you control the assets until the child reaches age 18 or 21 in some states. At that time the assets are turned over to them.”

Gobo said for a child, a Roth IRA may be the best choice because the child is unlikely to benefit from tax deductions available with contributions made to a traditional IRA. And with a Roth, you’re looking at decades to tax-free growth.

“They can also withdraw any contributions – not the investment earnings – for any reason without tax or penalty,” Gobo said. “In addition, your grandchild’s IRA will not be counted with their assets in the event they apply for financial aid eligibility.”

You can open an IRA account online or through your broker or financial advisor, but note that not all institutions will offer custodial IRAs.

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This story was first posted in June 2015.