Have you thought about opening a Roth IRA for your child to give them a headstart on saving for retirement? Opening a Roth IRA account for your kid can mean that they will benefit from decades of compound interest. It can be a great way to introduce the concept of saving and investing to your child. However, there are a few things you need to think about before you open a kids Roth IRA.
How does a kid Roth IRA work?
Roth IRAs for kids work exactly the same as a normal Roth IRA. Only earned income can be contributed to a Roth IRA and the account requires an adult to open on behalf of the child.
The most important thing to note is that your kid must have earned income for that specific year. Earned Income is defined by the IRS as “all the taxable income and wages you get from working […] for someone who pays you or in a business you own.” Money from an allowance or investing income does not count as earned income.
What age can I open a Roth IRA for my child?
There are no age restrictions. Your child can open a Roth IRA as long as they have earned income regardless of their age
How can I open a Roth IRA for my child?
Roth IRAs generally require an adult to open. Fidelity, Schwab, and E*Trade offer custodial Roth IRA accounts. The process to open a Roth IRA is very simple. The adult then manages the custodial Roth IRA on behalf of a minor until they reach the age of majority. The age of majority is dependent on the state that the child lives in.
How much can a child put in a Roth IRA?
The Roth IRA contribution must not exceed the child’s earned income. The contribution limit for a Roth IRA for a child in 2022 is $6,000. For example, if your child earns $3,000 in 2022, then they can only contribute $3,000 to their Roth IRA for 2022. If your child earns $10,000 in 2022, then they can only contribute $6,000 to their Roth IRA for 2022. If your child has no earned income then they cannot contribute to a Roth IRA.
Can parents contribute to a Roth IRA for a kid?
Yes, direct contributions to a Roth IRA can be done by parents or someone else. It is also important to remember that the Roth IRA contribution must not exceed how much your kid made that year. For example, if your kid made $2,000 then only $2,000 can be put into the Roth IRA by either yourself, someone else or your kid.
Some parents may choose to match their child’s earnings and make an IRA contribution on their behalf instead of the child’s pay going directly into the Roth IRA account. However, remember to consider gift tax rules. The contributions you make to a Roth IRA for your kid do count against the limit on tax-free gifts. The gift tax exemption amount is $16,000 for 2022.
How do I prove my child’s income for a Roth IRA?
Ideally your child should have a W2 or a Form 1099 to show evidence of the earned income. However, there are some instances where this may not be possible so it’s important to keep records of the type of work, when the work was done, who the work was done for and how much your child was paid. Some examples of work that may not have a W2 or Form 1099 include if your child is mowing the lawns for your neighbor or if they are working for your family business.
Open a kids Roth IRA and benefit from compound interest
Get a head start on retirement savings and wealth building for your children. While your child may not want to invest their money right now, they will thank you later. There is a huge advantage to opening a Roth IRA early since your child will benefit from decades of compound interest.