Can You Open a Roth IRA With Your Child?

Learn about your options for opening retirement accounts for minors

Fact checked by Yarilet PerezReviewed by Margaret JamesFact checked by Yarilet PerezReviewed by Margaret James

You cannot open a Roth IRA account with your child as you would open a joint bank account with someone. However, you can help your child open their own Roth IRA account.

Roth IRAs can offer some tax advantages to savers, including the benefit of tax-free qualified distributions. Learn how you can help a child who earns income open a Roth IRA to get a head start on saving.

Key Takeaways

• Roth IRAs are tax-advantaged retirement savings accounts designed to be owned by one person.
• A Roth IRA can be opened for a minor child who has earned income for the year.
• Roth IRAs can offer tax benefits, including tax-free qualified distributions in retirement.
• Parents maintain control of the Roth IRA until the child reaches adulthood, at which time the account is transferred to them.

How a Roth IRA Works

A Roth IRA is a type of retirement account that allows for tax-advantaged savings. These accounts are governed by Internal Revenue Service (IRS) rules that dictate who can contribute, how much they can contribute, and how distributions are taxed.

Here are the defining characteristics of a Roth IRA:

• Contributions are not tax deductible
• Qualified withdrawals are tax-free
• Original contributions can be withdrawn without a tax penalty
• There are no required minimum distributions (RMDs)

Roth IRAs have annual contribution limits. For 2024, the limit is $7,000, with an additional $1,000 catch-up contribution allowed for savers age 50 or older. Whether you can contribute to an IRA depends on your filing status and modified adjusted gross income (MAGI).

Source: Internal Revenue Service

Important

You can contribute to a Roth IRA even if you already have a retirement plan at work, as long as you’re within the income guidelines.

Opening a Roth IRA for a Child

It’s possible to open a Roth IRA on behalf of a child only if that child has earned income. You would need to set up a custodial account, which you can do through a brokerage.

Custodial accounts—which also can be used to save for education expenses for kids—are controlled and managed by an adult for a minor child. Once the child reaches adulthood, the assets in the account become theirs.

Opening a custodial IRA for a minor child isn’t that different from opening an IRA for yourself. The main steps include:

• Choosing a brokerage
• Completing the application for a custodial IRA
• Linking an external bank account for funding

You’ll need to share your personal details, including your name, date of birth, and Social Security number. The brokerage will need the same information for your child.

A custodial Roth IRA for a minor child follows the same rules for contributions as a noncustodial IRA. The maximum contribution allowed must be the lesser of $7,000 for 2024 or their total earned income for the year.

For an adult, the lesser-amount restriction rarely comes into play. For a kid, of course, it often does. For example, if your child earns $3,000 in one year from mowing lawns or babysitting, then the most that they could contribute to a custodial Roth IRA is $3,000. You can’t put in another $3,000 of your own money to reach the $6,000 limit.

However, the IRS won’t know where the cash actually came from. Theoretically, if your child has earned $3,000, you could contribute $3,000 on their behalf—or match what they contribute, up to $3,000. This is a good way to introduce the concept of matching funds—which your child will, you hope, encounter later in the workplace with an employee 401(k).

It may be helpful to discuss tax filing with a tax expert if your child has higher earned income or money earned from self-employment.

Benefits of Opening an IRA for a Child

There are some good reasons to consider opening an IRA for a child if they’re already earning money. One of the most obvious advantages is that time is on their side when it comes to saving.

The more time their money has to grow, the more they can capitalize on the benefits of compounding interest. As they’re adding money to a Roth IRA instead of a traditional IRA, kids also get the benefit of tax-free distributions later when they’re ready to use that money for retirement.

Using an investment calculator can be a helpful way to drive home the difference between saving money and investing it.

Roth IRAs offer flexibility, as original contributions can be withdrawn without triggering a tax penalty. Funds withdrawn from original contributions can be used for any purpose.

For example, your teen might take $4,000 from their Roth IRA to buy a used car. Once the account has been open for five years, your child can take out up to $10,000—without penalty and tax free—toward the purchase of a first home.

Opening a Roth IRA can also be a good way to introduce kids to the difference between saving and investing, and to instruct them on how the stock market functions.

You can sit down with kids to review their investment options and explain how stocks, mutual funds, and bonds work. This can also be a good opportunity to illustrate the power of investing versus saving in terms of the potential returns earned over time.

Frequently Asked Questions (FAQs)

What Is the Youngest Age You Can Start an IRA?

You can start an IRA at any age if you are earning income. If you are a minor, you will need the help of a guardian or parent to open the account. When you become 18, you will no longer need their help and the account will transfer to your management.

Can I Open a Custodial IRA for My Child With My Own Money?

No. A custodial IRA can only be established based on money that a minor child earns. If your child doesn’t have earned income, then you can’t open a custodial IRA for them. After the account is open, you can never contribute more to that account than the child has actually earned, up to the annual IRA limit.

How Much Can a Minor Contribute to a Roth IRA?

Minors who have a custodial IRA are limited to contributing the annual contribution limit or the total of their earned income for the year, whichever is less. The annual contribution limit is established by the Internal Revenue Service (IRS) and adjusted regularly for inflation.

The Bottom Line

Opening a Roth IRA for a minor child or teen can be a good way to introduce them to basic financial concepts, such as saving and investing. A parent oversees the account and helps guide them with their investment decision-making until they’re old enough to manage their IRA on their own.

When opening a custodial IRA for a child, it’s important to compare options at different brokerages. Specifically, you should pay attention to the range of investment options, fees, and ease of use of the brokerage’s online platform or mobile app.

Read the original article on Investopedia.