The majority of kids, whether they are teenagers or not, don’t give retirement much thought. After all, retirement savings may not even cross your mind when you’re balancing extracurricular activities, schoolwork, and all the other challenges of adolescence.
But that doesn’t mean astute parents, grandparents, and other family members can’t intervene to help their kids start saving for retirement. Creating a custodial account Roth IRA, also referred to as a Roth IRA for Kids or, more broadly, a Roth IRA for minors, is one way to accomplish that at Fidelity.
All of the advantages of a standard Roth IRA are available to children under the age of 18, however, with a Roth IRA for Kids. Since minors are typically not allowed to open brokerage accounts in their own names until they turn 18, an adult must act as the custodian of a Roth IRA for Kids.
The child’s Roth IRA remains under the custodian’s control, and they make all the decisions regarding contributions, investments, and distributions. In addition, statements are sent to the custodian. The minor is still the beneficial account owner, though, and the money in the account has to be utilized for the minor’s benefit. Once the minor becomes legally adult (18 or 21 in most states), the assets have to be moved to a new account under their name.
Here’s a breakdown of the requirements for opening a Roth IRA for your child:
- Earned income: Your child must have earned income during the year. This can include income from a job, freelance work, self-employment, or other legitimate sources.
- Contribution limit: The maximum contribution for 2023 is $6,500, or the total of your child’s earned income for the year, whichever is less.
- Custodial account: Since children under 18 cannot open brokerage accounts in their own name, a Roth IRA for your child will require an adult to serve as custodian. This adult will manage the account until your child reaches the age of majority, typically 18 or 21 depending on the state.
What if my child doesn’t have earned income?
If your child doesn’t have earned income, there are still ways to help them start saving for retirement:
- 529 plan: A 529 plan is a tax-advantaged savings plan designed specifically for education expenses. However, some states allow you to use 529 plan funds for qualified K-12 expenses or even future apprenticeship programs. This can be a great option for younger children who haven’t started earning income yet.
- Savings account: A high-yield savings account is a safe and easy way to start saving money for your child’s future. While the interest earned won’t be tax-free like a Roth IRA, it’s still a good way to build a foundation for their financial future.
- Gift money: You can contribute gift money to your child’s Roth IRA, but it will count towards their annual contribution limit. For example, if you contribute $2,000 to your child’s Roth IRA and they earn $1,000 from a summer job, they can only contribute an additional $3,500 for the year.
Benefits of a Roth IRA for your child:
- Tax-free growth: The earnings in a Roth IRA grow tax-free, which can significantly increase the value of the account over time.
- Tax-free withdrawals: When your child reaches retirement age (59 1/2) and meets certain requirements, they can withdraw their contributions and earnings tax-free.
- Flexibility: Your child can withdraw their contributions from a Roth IRA at any time without penalty, although earnings may be subject to taxes and penalties if withdrawn before age 59 1/2.
Considerations:
- Long-term investment: A Roth IRA is a long-term investment, and your child won’t be able to access the funds until retirement age.
- Income limitations: There are income limitations for contributing to a Roth IRA. For 2023, the income limit for single filers is $153,000.
- Investment risks: Like any investment, a Roth IRA is subject to market risks. The value of the account can fluctuate, and there is no guarantee that your child will earn a return on their investment.
While a Roth IRA is an excellent option for children with earned income, there are alternative ways to start saving for their future if they haven’t started earning money yet. Carefully consider your child’s age, income potential, and your financial goals before deciding which option is best for them.
4 things you may not know about 529 plans
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The majority of kids, whether they are teenagers or not, don’t give retirement much thought. After all, retirement savings may not even cross your mind when you’re balancing extracurricular activities, schoolwork, and all the other challenges of adolescence.
But that doesn’t mean astute parents, grandparents, and other family members can’t intervene to help their kids start saving for retirement. Creating a custodial account Roth IRA, also referred to as a Roth IRA for Kids or, more broadly, a Roth IRA for minors, is one way to accomplish that at Fidelity.
All of the advantages of a standard Roth IRA are available to children under the age of 18, however, with a Roth IRA for Kids. Since minors are typically not allowed to open brokerage accounts in their own names until they turn 18, an adult must act as the custodian of a Roth IRA for Kids.
The child’s Roth IRA remains under the custodian’s control, and they make all the decisions regarding contributions, investments, and distributions. In addition, statements are sent to the custodian. The minor is still the beneficial account owner, though, and the money in the account has to be utilized for the minor’s benefit. Once the minor becomes legally adult (18 or 21 in most states), the assets have to be moved to a new account under their name.
Put your child’s earnings to work
If a minor received income during the year, they may contribute to a custodial Roth IRA for Kids. Eligible income can include formal employment income or self-employment income. Undertakings such as lawn maintenance or babysitting can qualify a minor for Roth IRA contributions. Keep in mind that self-employment taxes (Medicare and Social Security) may be applicable in some circumstances, so it’s best to speak with a tax expert. As of right now, the maximum annual contribution is $6,500, or the amount that a child has earned that year, whichever is lower. You could contribute up to $2,000 to a Roth IRA in your daughter’s name, for instance, if she made $2,000 working a summer job.
The 5-year aging requirement must be met, you must be 59½ years of age or older, or you must qualify for one of several exemptions (disability, qualified first-time home purchase, or death among them) in order for a distribution to be deemed qualified.
Keep in mind that investing involves risk. Over time, the value of your investment will change, and you could make or lose money.
Fidelity does not provide legal or tax advice. This material is generic in nature and is not intended to be used as legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
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If your child isn’t reporting their earned income on a tax form, you might want to keep a written record of their earnings in case the IRS has any inquiries. Contributions to Roth IRAs are made with after-tax money, in contrast to traditional IRAs. This implies that the account owner is unable to deduct any of their contributions from taxes. But since the majority of children earn little money each year, their income tax rate is already very low or even zero. Therefore, at this point in their lives, tax deductions might not be a significant consideration. Furthermore, unlike distributions from a traditional IRA, certain qualified withdrawals from a Roth IRA will be tax-free when it comes time to access their savings at retirement age.
Watch This Before You Open A Roth IRA For Your Kids
FAQ
Can you open a Roth for a child with no income?
How do I prove my child’s income for a Roth IRA?
Can a student with no income contribute to a Roth IRA?
Does my child need to file a tax return to open a Roth IRA?
Can a child open a Roth IRA?
Opening a Roth IRA for kids under 18 is allowed, but there are certain rules you have to follow. Here are five things to know before you start helping your kid save for their retirement. 1. They need earned income Anyone who funds an individual retirement account (IRA) needs to have earned income, including children.
Are Roth IRAs good for kids?
Roth IRAs are ideal for kids, because children have decades for their contributions to grow tax-free and contributions can be withdrawn tax and penalty-free. There are no age limits for custodial Roth IRAs, but kids must have earned income and obey contribution limits.
Can a minor contribute to a Roth IRA for kids?
When the minor reaches a certain required age, typically either 18 or 21 in most states, the assets must be transferred to a new account in their name. A contribution to a custodial Roth IRA for Kids can be made if a minor has earned income during the year. Eligible income can include formal employment income or self-employment income.
How do I start a Roth IRA for my child?
1. Make sure your child has earned income. Remember, a person must have earned income in order to contribute to a Roth IRA. That rule applies to kids as well as adults. 2. Pick a broker. Possibilities include Fidelity, Charles Schwab and Vanguard. 3. Open an account.