Are you trying to come up with a creative gift to buy your teenage kids for the holidays this year? Or have you given up and just plan to give them cash? In either case they might qualify for an alternative gift that effectively keeps on giving for the rest of their lives: a Roth Individual Retirement Account (IRA).

For those unfamiliar with a Roth IRA account, here’s how they work. All of the income you earn from a job can be contributed to the account up to a certain limit ($6,000 in 2019). Unlike a traditional IRA, you do not get a tax deduction for the contribution. But all the future growth in the account will be available to you tax-free after age 59½, unlike a traditional IRA for which all future withdrawals will be taxed. 

What if your child is under age 18? No problem. You simply create a custodial Roth account at any brokerage naming yourself, another parent, or even a grandparent as the custodian. It’s still their money and they will get full control of it after they turn eighteen.

But what does all this have to do with gifting? Most likely your kids have little interest in saving their earnings for a retirement future that’s all but unimaginable right now. They’d probably rather spend whatever they earn. By offering them a gift of cash equal to the amount they would be willing to put into a Roth, you are accomplishing two things. You are providing them with a cash gift for spending, and perhaps more importantly you are training your children to begin a savings regimen that they will hopefully follow throughout their lives. That’s what I’d call a win-win!

Of course, if your kids did not work at all in 2019, they cannot contribute to a Roth account. But there’s a host of jobs available to teenagers such as babysitting, lawn mowing, and dog walking that all qualify for Roth contributions even if the money is paid in cash and not reported to the IRS. Your children should, however, make sure to keep good records of such activities just in case the IRS should stop by for an audit.

Can your children work for you and contribute what you pay them into a Roth? Yes, if you have your own business and they are doing legitimate work. And you’ll even get to deduct the amount paid to your kids as a business expense. But they will have to pay FICA taxes on their earnings so there is a tradeoff. Less legitimate would be contributing money you pay them simply for doing chores around the house. To be certain, consult with your tax accountant before doing anything the IRS might deem suspicious.

Just how valuable is the gift of a Roth account? Suppose your 15 year-old daughter merely earned $300 this year from babysitting and she put it all into a Roth. By the time she is ready to retire at age 65, even at a conservative 6% annual return, that contribution will have grown to over $5,500. And it will be available to her completely tax free. All from just a few nights of work in just a single year. Did you ever imagine that babysitting could be so lucrative?