What Is a Roth IRA for Kids?

December 7, 2023

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Some parts of childhood require waiting. You’re just not old enough is probably something you’ve told your child before. So it may surprise you that saving for retirement isn’t something your kid needs to age into. If you have a minor earning an income, they can already start building their retirement fund with an IRA.

What types of IRAs can you open for kids?

There are two types of individual retirement accounts (IRAs) you can open for a kid: Traditional and Roth.

There are several differences between a Traditional IRA vs. a Roth IRA, but here’s the key takeaway:

With a Roth IRA, your contributions are made with after-tax dollars, but your withdrawals in retirement are tax-free as long as certain conditions are met.
With a Traditional IRA, your contributions grow tax-deferred until withdrawn in retirement.

And while both technically may be an option for your child, we’re going to focus on Roth IRAs.

What is a Roth IRA for kids?

There’s really no such thing as a “Kids Roth IRA” account – it’s simply a regular Roth IRA that parents establish for their child.

Here’s how it works in a nutshell: Money is added to the account with post-tax income that your child has earned, that money grows over time, and then your child gets to withdraw the money tax-free in retirement. But be aware that there are certain account rules you'll need to follow.

Let's go over a few important ones below.

Potential tax-free withdrawals with a Roth IRA

If your child wants to enjoy tax-free withdrawals, they will have to hold the account for at least five years and wait until they turn 59 ½ before tapping into their money. Since we’re talking about opening a Roth IRA for a kid, the five years should be a lock.

Good to know: Keep in mind that contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time. However, withdrawals of earnings prior to the age of 59 ½ (or before the account is 5 years old) are generally subject to income tax unless it’s a qualified distribution and to a 10% early withdrawal penalty unless you qualify for an exception.

That being said, contribution and withdrawal rules for Roth IRAs are always subject to change, so it’s a good idea to talk to a financial advisor or tax professional if you have questions. You can also visit the IRS website for the most up-to-date information.

What are the other rules of a Roth IRA for kids?

Your child must have earned income. Money that goes into your kids’ Roth IRA has to be income your child has earned, defined by the IRS as taxable income and wages. That means birthday checks don’t count. However, money from babysitting, dog walking or jobs that come with a W-2 (restaurant gigs for instance) are considered earned income. Since many childhood jobs do not come with a W-2, it’s important to keep a record of the type of work, how much they earned, and when they earned it.
There is no age limit. Your child can contribute at any age, as long as they have earned income.
Contribution limits apply. Roth IRAs are subject to annual contribution limits. For example, in 2023, the maximum annual contribution limit is $6,500 ($7,000 for 2024). But remember: Kids can only contribute as much as they’ve earned in a given year. If the amount your child earned for the year was $2,000, that’s the most they can contribute.

Does my kid really need to start saving for retirement this early?

It's never too early to start saving! Let’s look at an example of how your child could really grow their retirement savings by investing early on.

Say your child contributes $50 a month of her post-tax earnings each year to her Roth IRA from age 10 to 21.

Since contributions to a Roth IRA are made with after-tax dollars, that $50 monthly contribution has already been taxed, and from age 10 to 21, she’ll have contributed a total of $7,200 dollars. Not too shabby.

Assuming she doesn’t touch that money and gets an average 8% rate of return on her contributions, her money will have already grown to over $12,000 in those 12 years.

Interested in learning more about the potential benefits of saving for retirement with a Roth IRA? Check out our “Traditional vs Roth IRA” article here.

How do you open a Roth IRA for kids?

You may see some accounts marketed as a Roth IRA for Kids but what you’re really setting up is called a custodial account. The adult – parent or guardian – would be in control of the Roth IRA until the child is legally considered an adult, which is typically 18 or 21, depending on your state. Once your child is considered a legal adult, the assets in the account must be transferred to a new account under your child’s name.

If you have any questions about opening a Roth account for your child, don’t hesitate to speak with a financial advisor.

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