Financial Planning

Help Your Kids Get a Head Start on Saving with a Roth IRA

Contributing to a Roth IRA is a highly efficient way to save for retirement. The earlier contributions are made, the more time savings will grow tax-free. Wouldn’t it be great if your children could take advantage of a Roth IRA and start saving in their teenage years? Good news! They can. Your child may be eligible to open a minor-owned Roth IRA to start saving for retirement, as well as other future expenses.

Minors may also be eligible to open traditional and inherited IRAs, but this article focuses only on the benefits of a Roth IRA.

Opening a Minor-Owned Roth IRA

The registration process varies from provider to provider, but the account is typically opened as a custodial Roth IRA. The child is the account owner, with an adult serving as the custodian. Contributions are reported to the IRS under the minor’s social security number, but the custodian completes the new account paperwork and is the individual authorized to act on the account. The custodian is usually (but not always) a parent. Providers may have additional requirements if someone other than a parent serves as the custodian.

There is no age requirement to make a Roth contribution—the same eligibility rules apply to both adults and minors. Once the child reaches the age of majority (either 18 or 21, depending on the state), the funds can be transferred into a Roth IRA in the adult child’s name. Subsequently, the adult child is authorized to manage the account.

Earned Income

The minor must have earned income to make a Roth contribution. A child with a part-time job after school or summer employment is a prime candidate.

Income Documentation

Ideally, your child’s employer will issue a W-2 for the work performed. But what if your child isn’t employed with a company but does neighborhood work, such as mowing lawns, shoveling snow, or babysitting? Is the money received considered earned income? The answer is, maybe. It’s up to you to document that your child received earned income and that the amount is reasonable. For example, you could not pay your child $1,000 for two hours’ worth of babysitting. Consultation with a tax advisor or CPA is recommended if you’re unsure whether your child’s work can be substantiated as earned income and if the pay is reasonable.

Funding the Roth

The total amount minors can contribute for a year is $6,000 (for 2020 and 2021) or 100 percent of their earned income, whichever is less. A commonly asked question is, must the contribution be made with the income earned by the child, or can it be funded with a gift from a parent or family member? Either option works. Keep in mind that the IRS imposes limits on tax-free gifts. If a minor-owned Roth IRA is funded as a gift, we recommend consulting a tax advisor to follow IRS gift tax rules.

Contribution Benefits

Five years after the first contribution is made to a Roth IRA, different options for withdrawing funds apply.

Retirement funding. Once the child reaches age 59½, all funds in the Roth IRA can be withdrawn tax and penalty-free. For example, let’s assume your 15-year-old son or daughter makes a $6,000 contribution and never contributes again. Assuming a 6 percent rate of return compounded annually, that contribution will be worth $110,520 when the child is 65 years old. That beats a regular savings account earning minimal interest. Please note: This scenario is hypothetical, and future rates of return can’t be predicted with certainty.

First-time home purchase. Your child can withdraw the earnings in the account tax and penalty-free to pay for costs associated with purchasing their first home. The amount not subject to tax and penalty is capped at $10,000. (Consult IRS Publication 590-B for details on what expenses are deemed eligible home acquisition costs.)

Education expenses. Earnings may be withdrawn to pay for qualified education expenses, including college tuition, books, and supplies. Distributions of earnings will not be subject to the early-withdrawal penalty but will be subject to ordinary income taxes. (Consult IRS Publication 590-B for details on what expenses are deemed eligible education costs.)

Emergencies. If needed for an emergency, account contributions can be withdrawn tax and penalty-free. In this case, the five-year waiting period after the account has been opened does not apply. The child’s contributions can be withdrawn at any time and at any age.

The Value of Saving

It’s unrealistic to expect children earning money to think about saving it for retirement rather than buying what they want now. But providing them with a Roth IRA is an excellent way to instill the practice of setting money aside for the future. Plus, if you agree to match the funds they contribute, you’ll demonstrate the importance of putting money away for the long haul. All in all, a minor-owned Roth IRA is a great way to teach your children the value of saving—and to get them started!


Are you interested in learning more about Roth IRAs? Schedule an Introductory Call with the KFP team!

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.



About Christopher Walsh, CFP®

I’m a Wealth Manager with Keystone Financial Partners, who has created a financial planning platform dedicated to helping young professionals make better decisions with their money. I was born and raised in the Hudson Valley region of New York, just north of New York City. I moved to Raleigh in 2010 with my wife, Lauren, our daughters, Aubrey and Ella, and our golden retriever, Duncan. When I’m not keeping up on financial news or meeting with clients, you’ll find me checking out local breweries with friends, hitting the golf course, taking trips to the beach, or spending time with my family. I started my financial planning career in 2006. I became a CERTIFIED FINANCIAL PLANNER™ professional in 2012. I chose this career because I absolutely love it – I truly enjoy taking complex issues and helping clients understand them. We help our clients reduce taxes, invest smarter, and retire on their terms.