“Help to start building your grandchild's nest egg early.”
Kiplinger Retirement Report explains in a recent article, “Seed a Roth IRA for Your Grandkids,” that the income they earn, can give their grandparents a chance to help them build a nest egg. Grandparents can contribute to a Roth IRA on their grandkids' behalf. Your grandchildren can later use the funds in these accounts for expenses like purchasing a home or building tax-free retirement income.
Another result of this gesture is to teach your grandchild the value of saving from a young age. As an illustration, if you were to contribute $2,000 a year over four years beginning when a grandchild is 15—with a modest 6% annual rate of return—those contributions will grow to more than $143,000 by the time the grandchild is age 66.
If he or she has a summer job or works while attending school, a grandchild has most likely earned income to be able to contribute to a Roth IRA. That contribution can't be more than he or she earned during the year or the maximum of $5,500 (in 2017 per the IRS), whichever is less. One idea is to deposit the money into the account for your grandchild and let your grandson or granddaughter hang onto his or her earnings. If she was to earn $3,500 from a summer job, then she can use it to buy a car. If you give $3,500 to the grandchild, then that money can be contributed to the Roth IRA.
The contribution you make to your grandchild is considered a gift to the child, so be certain to arrange that with your other gifts for the year. A grandparent can give up to $14,000 per year per person, without having to file a gift tax return (or a total of $28,000 to one person from both grandparents).
You can also “pre-fund” an account. However, in the event your grandchild's job falls through or she earns less than was expected, you’ll need to make ensure the excess contribution and its earnings are withdrawn from the account before the next tax filing deadline.
Depending on state law, you will be able to maintain control of the money until the grandchild turns 18 or 21, and then the grandchild can use it however she wants.
Reference: Kiplinger Retirement Report (May 2017) “Seed a Roth IRA for Your Grandkids”