By Theresa Fry, Senior Vice President and Manager, IRAs, Retirement and Education Planning

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If you are like most parents with a household of kids at home for the summer, you are probably busy scheduling summer camps and other activities to keep them busy all summer long. For those of you with teenagers or college students who will be working during the summer, keep in mind that there are more advantages to that summer job than the kids having a little more spending money. Those summer earnings can be used to open and fund a traditional or Roth IRA.

If convincing your kids to use their summer earnings to open an IRA is going to be a hard sell (ok, not if – it will be a hard sell), the good news is they don’t have to be the ones funding the IRA. Anyone can make the contributions as long as the child is the one with the earned income. But if you want to teach them the value of saving early and often, or the basics of investing, there’s always the option of having them contribute a portion while you (or grandparents, aunts, uncles, or non-family, etc.) match what they put in. As an added bonus, IRAs are not considered an asset when applying for college financial aid.

If your child will be working but not at a place where they get a regular paycheck, it’s important that the child’s wages are documented.  Household chores don’t typically count as earned income, but money earned from steady summer jobs like mowing lawns or babysitting that are from someone other than a parent, or even from employing your children in your own business, can be treated as earned income. Make sure you discuss your situation with your tax professional for guidance on what kinds of records to keep for the type of employment your child has before making contributions.  Contributions are limited to 100% of earned income or $6,000, whichever is less.

When deciding what type of IRA to use, keep in mind that the tax advantages of a traditional IRA and a Roth IRA are different.  Traditional IRAs can provide an income tax deduction for individuals with lower incomes but if the child does not file an income tax return, the tax deduction may be of little value.  Traditional IRA contributions are generally included in taxable income when distributed and can also be subject to a 10% early withdrawal penalty if taken before the age of 59 ½.  Roth IRA contributions are not tax deductible and are not reported on a federal income tax return (1040 form).  Another advantage is that contributions can be withdrawn without income taxes or penalties.  Earnings on contributions may be taxable and subject to the 10% early withdrawal penalty if they are removed before reaching age 59 ½ if the Roth IRA has not been funded for at least five years.  However, after the satisfying the combination of five years and age 59 ½, earnings are also income tax-free.

Time is the best ally when using tax-advantaged savings accounts like IRAs, so help your working children get a jump start by contacting a Benjamin F. Edwards financial advisor today!