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Roth IRA Rules For Minors. Your Kids Guide to Tax Free Money

Jeff Rose, CFPĀ® | April 21, 2022

My baby boomer clients are finally starting to grasp the concept of the tax-free benefits of the Roth IRA. So much in fact that they want to make sure that their kids start a Roth IRA and, in some cases, even their grandchildren.

I even had one grandfather who wanted to set up a Roth IRA for his 5-year-old grandson. While giving your kids the benefit of tax-free savings sounds sweet, there are some key rules when it comes to Roth IRAs for minors.

Starting a Roth IRA for Children/Kids


Here’s what you need to know about how your kids can enjoy tax-free money. Be sure to check out the rest of the Roth IRA rules.

Roth IRA For Minors

Amazingly, there is no minimum age requirement to open a Roth IRA.   The only requirement is that the child have “earned income”.  What defines earned income?  According to the IRS.gov website:

Earned income includes all the taxable income and wages you get from working. There are two ways to get earned income: You work for someone who pays you or you work in a business you own.

Does a paper route count?  Sure can.  What about household chores?  That’s a gray area, but most tax experts lean towards no. (Be sure to always ask your tax professional).  What about child actors?  Absolutely.  I think that means that all 8 kids of John and Kate plus 8 could start a Roth IRA.  I just hope they have a good financial advisor šŸ™‚


 

Other items to note is that the child will only be able to contribute to a Roth as much as they earn.  The 2015 limits are $5,000 but if the child only earns $2,000 for the year, that’s all they’ll be able to put in.

Who’s the Owner?

Depending on where you go to open the Roth IRA, there may be different requirements.  When I worked for my previous firm, I had a client whose 16-year-old working son wanted to start a Roth IRA.  My firm allowed it, but the father had to sign for him.  Once the child celebrates his 18th birthday, the Roth IRA is officially his. (We’ll talk more about that in a bit).

Drawbacks of Roth IRA’s for Kids

Hard to believe there are any drawbacks to tax-free money, but there is one. The only drawback for opening a Roth IRA in the name of a minor is that the ownership of the account passes on to the child when he or she attains maturity.

That means that at the age of 18, the child (now adult) can do with the money whatever they choose. I”ll let your imagination take over on what an 18 year would do with a windfall of money.

Can You Just Open a Roth IRA for the Child?

After funding their retirement needs, many wish to pass on any remaining to their heirs. But for some, they wish that we could have some control when their heirs could get the money. I once had a reader that wanted to know how he could give his grandson the tax-free benefit of the Roth IRA.  In my opinion, this is one cool grandfather.

The reader was roughly 60 years of age and wanted to open a Roth IRA for his five-year-old grandson. He wanted to make a $1,000 contribution into a Roth IRA thinking that the grandson would not be able to touch the money until he was age 60, and then he could benefit from the tax-free growth that the Roth IRA provides.

Just to give you an idea, if $1,000 were to earn on average 8% in a stock-like investment over the course of 55 years, it would grow to be around $101,000. The grandson would then have roughly $100,000 of tax-free money waiting for him at retirement. (At least that’s what the grandfather was hoping for).

While I appreciate the tactic that the grandfather was trying to implement, we do incur a bit of a problem. Since the grandson does not have any earned income, he would not be able to start a Roth IRA. Bummer.

Different Strategy

After the initial attempt to pass on to grandson didn’t work out, he inquired about a different approach. He wanted to know if he could open a Roth IRA for himself and then make the grandson the sole beneficiary. Thinking again that the grandson could not touch the money until age 60.

Unfortunately, in that scenario, when the grandfather passes away the grandson would inherit the account and would have access to the money immediately, and would not have to wait until age 60. In addition, the grandson would be required to take out the required minimum distributions as a non-spousal beneficiary.  Unfortunately, that idea did not work either.  (The grandfather was still working at this time.  If he was not and didn’t have earned income, he would not be able to open a Roth.)

Another possibility

If the grandfather would wait until the grandson actually had the earned income, he could then open up a Roth IRA in the child’s name. The only downside is that the child would have access to the funds and could withdraw them at any time possibly subject to tax and penalty. But if the child was educated on the tax-free benefit waiting for him at retirement, then the grandfather’s wishes may be achieved.

Where to Open an Account

As you can see, if you know the rules, your kids could benefit from the Roth IRA sooner than later.  When your child starts receiving earned income, explain the benefits of the Roth IRA and get them excited.  You can even help them get started.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute specific individualized tax, legal or investment advice.  We suggest that you discuss your specific tax issues with a qualified tax or legal advisor.

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About the Author

Jeff Rose, CFPĀ® is a Certified Financial Plannerā„¢, founder of Good Financial Cents, and author of the personal finance book Soldier of Finance. He was a financial planner for 16+ years having founded, Alliance Wealth Management, a SEC Registered Investment Advisory firm, before selling it to focus on his passion - educating the masses on the importance of financial freedom through this blog, his podcast, and YouTube channel.


Jeff holds a Bachelors in Science in Finance and minor in Accounting from Southern Illinois University - Carbondale. In addition to his CFPĀ® designation, he also earned the marks of AAMSĀ® - Accredited Asset Management Specialist - and CRPCĀ® - Chartered Retirement Planning Counselor.

While a practicing financial advisor, Jeff was named to Investopedia's distinguished list of Top 100 advisors (as high as #6) multiple times and CNBC's Digital Advisory Council.

Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.

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34 Comments

  1. Chris May 19, 2020

    My daughter age 14 worked part time for my wife’s employer 40 hours total, made $600. There’s no documentation except the company I assume has an image of the cashed check. How do I further document? Do they have to issue her a 1099? Does she have to file taxes despite not owning anything?

    I want to open an IRA for her and whenever she works in this manner, put my own money into the account equal to her earnings.

    Reply
  2. angelo giammalva December 31, 2018

    How do I show my 10 years old son works in order to open a custodial Roth ira

    Reply
    • Jeff Rose January 26, 2019

      Hi Angelo – I would think a W2 or paystubs would be all that’s needed.

      Reply
  3. Elaine Capuno August 12, 2018

    Hi Jeff,
    My 16 yr oldson works for my business and he gets a W2. He earns $4800 a year. You said any brokerage company will allow him to open an IRA as long as he has earned income. I checked Vanguard and Schwab and they require the account holder to be 18, saying he is too young to pen an account and directs him to the 529 which he already had. DO you know of specific companies that will allow someone like him to pen an IRA? Thanks.

    Reply
    • Jeff Rose August 18, 2018

      Hi Elaine – Fidelity says they’ll do it.

      Reply
  4. Rose May 23, 2018

    Hi Jeff,
    My 17 yo boys would like to start a Roth IRA. They have earned income but have not yet filed a tax return. Do they have to wait until after they have filed a return or can they set it up now and file a return next year? They haven’t had enough income to file yet.
    Thanks in advance,
    Rose

    Reply
    • Jeff Rose May 29, 2018

      Hi Rose – They can make contributions up to the amount of income they’ve earned, as long as it’s W2 type income. They don’t have to file a return to be eligible.

      Reply
  5. Dennis Goggin April 5, 2017

    Hi Jeff,

    Can I open a Roth IRA for my child without filing a tax return for them? For example, they made $2,000 cash in 2016 for babysitting income at age 10 so they weren’t required to file. Do I need to report this cash to the IRS in order to open a Roth IRA?
    Can I still claim them as a dependent on tax return along with opening a Roth IRA?

    Thanks!

    Reply
    • Jeff Rose April 22, 2017

      Hi Dennis – You should be able to make the contribution even without filing a return for them, but you may want to do so just so there is a tax record. You should still be able to claim them as dependents since they earned less than the threshold for filing.

      Reply
  6. Dee October 19, 2016

    I have seen people who leave their retirement to their trust for the benefit of their child or grandchild. The trust dictates that they may not take out more than the annual RMD and makes a determination whether the account can be disbursed to the beneficiary once they obtain a specific age. This does require that a tax return be filed every year by the trustee since the trust has become irrevocable after the passing of the Grantor and is identified by a tax id number. However the benefit is that it allows for the parent/grandparent to direct the distribution of assets beyond their lifetime. In addition, for firms like the one I work with most software is not smart enough to do the calculations for the annual RMD so it needs to be done manually which leaves room for error. It is a good idea to have this figure double checked before processing it annually.

    Reply
  7. Mark Fuhr September 15, 2016

    Is there any vehicle (other than a Roth) where some kind of retirement account can be started by a grandparent for a child with little or no earned income?

    Reply
    • Jeff Rose September 20, 2016

      Not really Mark. Retirement savings are tied to earned income, because that’s what you retire from. You can do with tax deferred savings for kids using a 529 plan or a Coverdell ESA for college.

      Reply
      • Leah October 25, 2016

        Hi, Jeff. I have 7 young grandchildren and opened IULs for each to have a sizable, tax-free retirements. Paying for 20 years and each account uses the Global index. Does not require them to have jobs. I understand the fees, but see in the long run how my grandchildren will benefit financially.

        Reply
        • Jeff Rose October 26, 2016

          Hi Leah – Those aren’t Roth IRAs but they are a possible work-around for kids who don’t have earned income. IUL are indexed universal life, that can invest in either a fixed account or an equity index account. It uses tax-deferred cash accumulation for retirement while maintaining a death benefit. That means that part of the premium will go to cover life insurance, so it won’t be a pure investment play. They aren’t for everyone, but they can work if a Roth isn’t possible.

          Reply
  8. Jay March 6, 2016

    Jeff

    If my kids get a 1099 on investments, can this amount be put into Roth IRA? Would I have to actually pull the cash from those accounts and put into Roth IRA? Or could we use other cash?

    Jay

    Reply
    • Jeff Rose March 11, 2016

      Hi Jay – The answer is “no”, you cannot put those amounts into a Roth IRA. A Roth IRA is an IRA, which means it can only be funded with earned income. So unless your son or daughter have some sort of job, you won’t be able to fund a Roth IRA (or a traditional IRA) for them at all. Sorry, but that’s the rule!

      Reply
  9. Alex May 31, 2015

    Hi, we have two 5 yrs old, I’ve opened two Pre-Paid 4 yr University accounts and 2 529s their first month after birth.

    My question is, how can I showed employment to open 2 IRAs that they can contribute and I can match their contribution?

    How do I do this?

    Alex

    Reply
  10. Mike April 3, 2015

    Regarding hiring your kids so you can contrbute to the IRA once should consider that they employer (parent) must withhold Employment taxes (At least FICA and Medicare) and pay the employer postion. Alternative the parents could issue a 1099 and let the kid pay the employment taxes. Hiring your kid to do chores would actually cost a parent money however if a parent hired a kid in their business then the business would get a deduction for the payment thus this is a great option.

    Reply
    • kurt June 28, 2015

      I’m not sure this is true. I see it on posts like this a lot regarding custodial Roth’s, but the IRS says a dependent making earned income under $6,200 (in 2014) does not need to file. The Roth max is under this.
      http://www.irs.gov/publications/p929/ar02.html

      Reply
      • Danny December 9, 2016

        Just because you do not have to file doesn’t mean you cannot file. This is the whole idea. You file even though you don’t have to. You don’t have to because you don’t owe taxes. Owing no taxes is the whole reason you want to do a Roth.

        Reply
        • Jeff Rose December 14, 2016

          Hi Danny – I follow your logic, but the only requirement is earned income, which can be substantiated with a W2. If the minor doesn’t need to file, then there’s no point. You can check with a CPA to get the right answer, but I suspect that’s what you’ll find.

          Reply
          • Channon April 9, 2017

            But, if the earned income is not from a W2 (think shoveling sidewalks, mowing grass, lemonade stand, paper route, if those still exist), then filing the tax return and owing $0 taxes (per Danny’s comment) would seem like a way to substantiate the earned income upon which the ROTH contribution is predicated.

            Reply
            • Jeff Rose April 23, 2017

              Hi Channon – I think you’re right, there has to be income shown somewhere to support the Roth contribution. IRA contributions are always based on earned income and that has to be documented, otherwise the Roth can be disallowed by the IRS.

              Reply
  11. Kevin March 23, 2015

    My son is 18 and made $3k this year. I want to open a Roth IRA for him. I wouldnt typically file a tax return for him, since his earned income is below the required amount. My question is–do I need to file a tax return for him if I want to open the Roth for him?
    Thanks
    Kevin

    Reply
    • Jeff Rose April 7, 2015

      @Kevin Double check with your CPA, but I would suspect that you would have to.

      Reply
  12. Tom March 16, 2015

    Hello Jeff,

    If a child (2-year-old) earns money ($100) for participating in a research study can that money be treated as earned income for the purposes of setting up a Roth IRA in the amount of $100? The research organization did NOT issue a 1099-MISC because the amount falls below the $600 threshold. All I have are the informed consent for study participation and the cash disbursement forms.

    Thanks,
    Tom

    Reply
  13. David December 29, 2014

    Maybe this problem can be address a little different. If the grandparent/parent wanted to make an agreement with the child that 100% of their earnings will go into a Roth and that the grandparent/parent would gift the amount contributed to the child. At this point you can get creative on how to make the official taxable earnings.

    Reply
  14. Dimitri January 13, 2014

    Hello Jeff,

    Could you tell me who your prior employer was that offered/allowed the IRA? I want my brother to open one for his son.
    Also, under the header “Different Strategy” you mention RMD for the beneficiary. I’ve never heard of RMD’s for Roths.

    Thanks for the great article.

    Reply
    • Jeff Rose February 12, 2014

      @ Dimitri Pretty much all brokerages will open a Roth IRA for minor’s. The minor just has to have income.

      Roth IRA’s do not RMD’s unless they are an inherited beneficiary Roth IRA.

      Reply
  15. Natasha April 19, 2013

    Hi Jeff -great to come across your offer and useful info . I want to open Roth IRA for my 17 y.o son. I have my own business and her was on my Co payroll 3 years ago for less then a year. Then accountant advice to remove him from payroll -but he still keep working for me for some cash . Can I still open Roth IRA for him on that income he officially earned 3 years ago ? and what percentage of his salary I can put on Roth IRA for him ? Thank you , Natasha

    Reply
    • Jeff Rose April 19, 2013

      @ Natasha Unfortunately, your son would have had to make the contribution prior to April 15th for the previous tax year. If doesn’t have any reportable income to report then he won’t be able to contribute. šŸ™

      Reply
      • J January 11, 2016

        I believe a child can have a contribution of $500.00 a year to his/her Roth IRA.
        This could come from birthday monies or little chores around the home.
        Cheers.

        Reply
  16. jim October 1, 2012

    Hypothetically speaking, If my wife and I were to own a business and hire our kids on a monthly salary of say $100, could we pay them in the form of the roth IRA? For instance, living on a working ranch, we have a small business selling farm animals. Could I employ my 5 year old to do part time work for strictly these benifits?

    Reply
    • Jeff Rose October 4, 2012

      @ Jim There has to be proof that they are actually on the payroll. But yes, many business owners do this for their kids.

      Reply

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