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Ask the Expert: Opening a Roth IRA for a teenager

Q: I'd like to get my teenager started saving for retirement. She has income from babysitting jobs. Can she open a Roth IRA even though she's only 16? If so, could I contribute to the account on her behalf?

A: Congratulations on your foresight -- one thing that younger generations can certainly do better than baby boomers is start focusing on retirement saving before it is too late, and it sounds like you are getting your daughter off to a good start.

Before getting into some details of IRS regulations, it should be noted that any retirement program should be set up with input from a qualified tax advisor who is familiar with your situation. However, there are a couple of general principles you can use as a starting point.

IRS guidelines state that "contributions can be made to your Roth IRA regardless to age." However, they are primarily referring to the lack of a maximum age limit, not a minimum one. You may find that your IRA custodian has special requirements with regard to setting up a Roth IRA for a minor.

As for contributing on your daughter's behalf, IRS guidelines state that contributions to Roth IRAs are limited to the lesser of $5,000 (for people under 50) or the person's taxable compensation. Because of the latter stipulation, even if your daughter's babysitting income is below $5,000, you couldn't supplement it with an additional contribution. However, you can help out indirectly by covering as many of your daughter's day-to-day expenses as possible, so she can save her babysitting income to go into the Roth IRA.

Once the account is set up, you can use it as a teaching exercise to teach your daughter about managing a long-term savings program -- determining asset allocation, comparing money market rates, evaluating mutual funds, etc.

Good luck with this far-sighted program!

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