Roth IRA For MinorsAmazingly, 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 🙂
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.
Whose 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 KidsHard 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.