Why to Open a Roth IRA for Your Minor Child

What is a Roth IRA?

A Roth IRA is a tax-deferred retirement account. Income that has already been taxed can be deposited into an individual retirement account and any earnings may be withdrawn after a qualifying condition or age is met, without incurring any taxes. It may not seem immediately obvious to open an IRA for your child, but they’re a smart idea.

Why is a Roth IRA a Good Idea for Kids?

Your little one might only be a teenager, but if they start saving for the future at a young age, they’ll have decades of income at their disposal when they retire. Some of the benefits of opening a Roth IRA for your minor child include:

• The earlier your start saving for the future, the more opportunity that fund has to grow. This growth could be due to earnings from investments or simply from repeated deposits over time.


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• Contributions to a Roth IRA—not the earnings from investments—may be withdrawn at any time, provided they have owned the account for at least five years. This makes this type of account an excellent savings vehicle that doubles as an emergency fund.
• Roth IRAs can be used for educational expenses without a penalty. You child can use their IRA to pay for college, and maybe even help their own kids pay for college in the future.
• Up to $10,000 in earnings from investments can be withdrawn from an IRA without tax penalties if it’s used for a first-time home purchase. This can be a huge benefit when making a down payment or covering closing costs, as that’s no small sum of money.
• Tax advantages of Roth IRAs work in kids’ favors. When your child is old enough to be able to withdraw the money in the account, they will be able to do so without paying any taxes on any earnings they have made over the years from their investments. The longer that account exists and is making money, the more the child will benefit.
• Saving for the future is a great idea. Investing is better because of the opportunity for growth that it offers. An IRA can help make money work for you; the earlier you have one, the more it can do. They also offer the opportunity to teach your child some amount of financial literacy and the importance of saving for the future.

Requirements for opening a Roth IRA for Kids

There are two types of Roth IRA that are available for minor children: custodial and traditional. A Custodial Roth IRA is entirely managed by a parent or other custodian until the minor turns 18—or 21, in some states. This option means that a parent or custodian is wholly responsible for the child’s investments. It’s not a requirement to use a custodial account; a child can have a traditional Roth IRA as there are no age requirements.

There are a few other requirements to open a Roth IRA for a minor child:

• The child must have some kind of earned income. This is defined by the United States government as taxable income and wages earned from a job that supplies a W2 or 1099 form. Income from self-employment, like babysitting and dog walking, is OK too, provided it can be confirmed.
• Despite the maximum annual contribution to a Roth IRA being $6,000, children may only contribute the total amount of earned income they have during a year. For example, if a teen only earns $2,000 babysitting, they can only contribute up to $2,000 to their Roth IRA. Parents can help their children save, but the combined contribution between parent and child cannot exceed a child’s earned income.
• Encourage your child to keep receipts for entrepreneurial work done if they’re not receiving traditional tax forms. These receipts should include information about the type of work, when the work was done, who the work was done for, and how much the child was paid for the work. Unfortunately, allowance doesn’t count as earned income, even if the child is paid for doing chores around the house.

Young people have an incredible advantage when it comes to saving for the future, simply because they have more time for their fund to grow. The earlier you start teaching your kids about money, the better chance they have for financial stability later in life.