Opening a Roth IRA For Your Child Can Provide a Huge Head Start

Roth IRA

by Jeff Deiss

CFP, AEP, Wealth Advisor

With kids home from school and summer jobs on their minds, we thought we’d share some info on how you can provide some additional financial motivation and perhaps give them a bit of an education at the same time.

You can open a Roth IRA in the name of a child to help him or her save for retirement, a first house, or, subject to some rules, educational expenses. You will not only be providing a head start on saving for the above, but also the child’s education in personal finance and, where parents or grandparents are contributing the funds, hopefully the opportunity to share your values about money and the beginning of a lifelong family conversation about important personal financial issues.

The child generally won’t owe taxes on the money when they withdraw it from a Roth IRA, no matter how much they have earned in the account over the years. This tax benefit is subject to one restriction: The money contributed must be held in the account for at least five years to get the full tax benefit.

The most important thing to know about this is that the child must have earned income in order to have a Roth IRA in their names. You (or the child) can contribute as much as they made, up to the current $5,500 annual Roth IRA limit. You or another adult will be the custodian on the account, but the child will be the owner.

It’s up to you (or the child) to document that they had income earned from work. Earned income does not include an allowance or a gift or unearned interest/dividend income from other investments. It’s up to the account custodian to document the service rendered, when it was done, and the payment. It also has to be a reasonable rate. Listing $1,000 for a night of babysitting isn’t reasonable and will not work.

Assuming you are following the eligibility requirements for the child’s earned income, then the contribution you make to a child’s Roth IRA can be a gift from you or someone else and will count against the annual gift tax exclusion, currently $15,000, for 2019. For some more detail, you can check out our post from 2018 by clicking here. If you have any questions, please reach out to your ACM Wealth Advisor.

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