Can I Open a Roth IRA for My Child?

Open a Roth IRA for My Child

It is possible to open a custodial Roth IRA account for your minor child, though you will have to manage it until your child reaches adulthood. If you open this type of account for your child, you will have to maintain and manage it until he or she reaches the age of 18 (or the age set by the state). Once your child becomes an adult, it will become a regular Roth IRA in the child's (now adult) name.

Contributing to a Child's Roth IRA

A custodial Roth IRA account doesn't actually have to be opened by the child's parents. It can be started by an adult other than the parents, including grandparents or other family members. There is no minimum age, but there is an "earned income" requirement. Any funds contributed to the account must come from the child's earned income.

  • Earned income can include income from part-time gigs or odd jobs such as babysitting or mowing lawns, but it can't be money just deposited by parents or other family members on the child's behalf.
  • Annual Roth IRA contributions have a limit, which can change from one year to the next. As of July 2018, the annual contribution limit for those under the age of 50 is $5,500.
  • As with Roth IRA accounts held by adults, contributions to the account cannot exceed the child's earned income for any given year.

Roth Versus Traditional IRA for Kids

Between the two options for individual retirement accounts for kids, a Roth IRA is far preferred to a traditional IRA. This is largely due to the fact that the majority of children will not benefit from the upfront tax benefit of a traditional IRA. However, the later tax benefits of a Roth account typically make sense in the long term financial success of the child.

Key Roth Account Advantages for Kids

Roth IRA accounts started at an early age really help to set the stage for creating significant wealth for retirement, with no future tax consequences. Not only do children get accustomed to putting some of their earnings away for the future, but the money grows and compounds with very little effort and they won't owe income tax on the money or the interest that accrues on it if they leave the funds alone until reaching retirement age. Additional advantages include:

  • Since the child cannot access the funds or make decisions about the money until reaching the age of adulthood, parents don't have to worry about their kid's earnings being wasted on frivolous adolescent purchases.
  • Unlike 529 accounts (educational IRAs), the money in the account does not have to be used solely for educational purposes.
  • Children who are fortunate enough to have this kind of account can eventually pull funds penalty-free from their Roth IRA to make a down payment on a house or to use if they become disabled.

Potential Roth Drawbacks for Kids

Of course, as with any investment option, there are also some drawbacks and limitations to consider. Factors to take into account include:

  • Seen as assets, Roth IRA accounts can affect financial aid eligibility for college.
  • Parents wanting to withdraw funds from the account will have to prove the funds will be used to the benefit of the child.
  • Withdrawing funds from a Roth IRA that is less than five years old may result in fees beyond the taxes on IRA earnings.

Benefits of Early Investing

Children with some form of earned income are well-served by opening a Roth IRA at an early age, especially when they get into the habit of putting earnings in retirement savings. These children quickly learn how compound interest works and gain insights into how wise, intentional investing can work to their advantage.

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Can I Open a Roth IRA for My Child?