- Parents and guardians can open a Roth IRA for their child, as long as they act as the account’s guardian.
- One important consideration for opening a Roth IRA for a child is that the minor needs to have first made income.
- Parents and others can invest money in a child's IRA, as long as these contributions meet certain income limits and requirements, which may change from year to year.
As a parent or guardian, you may be exploring ways to save for your child’s future and set them up for financial success. There are many options. Among them is a Roth individual retirement account (IRA).
Otherwise known as a custodial Roth IRA, a Roth IRA for kids can be a suitable option, as long as the minor for whom you are opening the account has earned income. A Roth IRA for children is, in many ways, similar to a Roth IRA for adults.
Before you begin, you’ll want to consider some logistics around setting up the account and making contributions, as well as understanding which documents to prepare.
Rules to open a Roth IRA for a child
While you can open a Roth IRA for your child, certain requirements and eligibility rules exist:
The child can be any age, but for a custodial Roth IRA specifically, they have to be a minor.
A child must have earned income.
A custodial Roth IRA has contribution limits.
When can I open a Roth IRA for my kids?
There is no minimum age limit to open a Roth IRA for kids, but since you’re opening an account for a minor, the child must be below the age of 18. You must also designate yourself, your spouse or the child’s guardian as the custodian on the account. The custodian opens the IRA on the child’s behalf and acts as the account’s guardian.
What if my child doesn’t have income?
A Roth IRA for kids is only appropriate for a child who has some type of earnings. However, this doesn’t mean that the child has to be employed at a traditional job. For example, self-employment income qualifies (like mowing lawns or babysitting), as long as it’s reported to the Internal Revenue Service (IRS).
To learn more about qualifying income types, it's best to speak with a financial professional.
Can parents contribute to a kid’s Roth IRA?
Parents’ eligibility to contribute to their child’s Roth IRA depends on a few factors. The biggest factor is the child’s earned income within the year, which is necessary for the child or others to make contributions. If your child made income from active participation in the workforce — even with a job that doesn’t provide a W-2 form, like babysitting or cutting the grass — they can contribute a portion of this income to a custodial Roth IRA.
Since the eligibility to open a Roth IRA is incumbent on a child’s earned income, you cannot deposit allowance money into a Roth IRA. You can choose to match their contributions dollar for dollar, as long as your contribution does not exceed their earned income for the year.
Furthermore, as of 2022, your child’s contributions cannot exceed $6,000, or their total earned income for the year, whichever total is lower.
As long as your child has earned income during the year, and the funds deposited into the account for that year do not exceed their earned income, anyone can contribute money to the Roth IRA. Contributions made on behalf of a child can’t be withdrawn by the custodian once they’re made, however.
Benefits of a Roth IRA for kids
Several benefits of opening a Roth IRA for a child include:
- Starting early can help build a generous nest egg
- May help teach children financial literacy
- Can provide tax-free growth for solid savings
- Penalty-free withdrawals of principal offer flexibility
- May provide a head start on retirement savings
A Roth IRA for a child offers a lot of potential upside, as well as numerous benefits for children who have one. If a parent or guardian decides this is a good option for their family, the next step is opening the account. Opening a Roth IRA for kids takes only a short amount of time once you’ve decided where you want to establish an account and chosen the account’s custodian.
How to open a child’s Roth IRA
Parents must do their research about where to open a Roth IRA for their child. Different financial institutions will likely have varying requirements. However, the basics include that the child must meet the requirements, and parents must provide the right information and documentation, such as the child’s name, date of birth and Social Security number.
Opening a Roth IRA for a child can be a great way to get them ready for their financial future. If you want more information before you pursue a kid’s IRA, you can seek advice from a financial professional to ensure you know all of your options and are making a confident decision that complements your financial goals.
The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. This information is governed by our Terms and Conditions of Use.