If the current income restrictions associated with Roth IRAs prevent you from using one for your own planning purposes, consider taking steps to ensure that your children or other younger family members establish and fund a Roth IRA of their own.
Roth IRAs offer ample tax benefits for retirement — particularly for younger investors. Yet perhaps the more long-lasting benefit of the Roth IRA can be realized when it is used as a wealth transfer mechanism.
One of the main contributors to successful retirement planning is time — the more of it you have, the better the result. For this reason alone, setting up a Roth IRA for a child can be one of your best long-term planning strategies. When investment compounding has upwards of 50 years to run its course, even a relatively modest savings rate can produce substantial wealth.
There is no minimum age requirement for opening a Roth IRA, and many IRA providers will accept accounts for minors. In most cases, the only real issue is whether the child has taxable earned income. Fortunately, there is no requirement that the same "earned income" is the money that funds the IRA. If your child earned income from a summer or part-time job, but then spent it, there is no restriction on using money provided by parents to establish and fund the IRA account.
You can contribute up to $5,000 to a Roth IRA in 2009 as long as your child earned at least that much. However, contributions cannot exceed your child's income for the year. Contributions to a Roth IRA are not tax-deductible, but earnings are never taxed provided your child meets the distribution requirements — chief among them waiting until at least 59 1/2 before tapping the account.
(Distributions from a Roth IRA may be tax free if you are at least 59 1/2 years old and have owned the Roth IRA for at least five years; your withdrawal of up to $10,000 (lifetime limit) is applied to a first-time home purchase; or you die or become permanently disabled.)