Typically, a Roth IRA account is not a savings plan or vehicle for your kids, but it can be! These accounts are extremely ideal for children as they’ll have decade’s worth of contribution growing tax-free. But, the best part about the Roth IRA accounts is that they are also very flexible, which means the contributions you make to the Roth IRA accounts can be withdrawn tax-free and penalty-free at any time!
Interesting Facts about Roth IRAs for your children
- The Roth IRA accounts do not have any age restrictions which means that kids of any change can contribute to these accounts as long as they are earning an income.
- In order for the child to operate the account, a parent or any other guardian will need to be the custodian of the account for the child. Additionally, not all brokerage firms or banks will offer these custodial IRAs.
- Given the fact that Roth IRA accounts are extremely flexible in how one operates them, this means they are convenient for your kids. What’s even best is that contributions can be withdrawn at any time.
How To Open A Roth IRA For Your Children
These days it is common to see many brokers advertising “a Roth IRA for your children” but it is important to know that the way this account work isn’t much different from other IRA accounts. The only difference may be the required amount to invest which may be less than the typical brokerage minimum and also, the fact that the kid’s IRA will require a custodian. Otherwise, every other aspect is the same as with the regular accounts.
By law, the Roth IRA for your children will require a custodian who will manage and control the assets in the IRA. This means that the custodian will make all the investment decisions until the child reaches the majority age, at which point the account will be turned over to the child.
The account is however opened under the child’s name, in addition, as the custodian; you will have to provide the social security number when opening the account.
Funding a Roth IRA for your Children
As long as a child is earning an income, they can legally contribute to the IRA, be it from an employer or from a small business of their own. In 2021, the max amount that a child can contribute to the IRA (either traditional or Roth) is the lesser of $6,000 or their taxable earnings for the year.
Practically; assuming that your one of your kid earns $3,000 during the year, they can contribute this amount to the account. On the other hand, if the other kid earns $10,000 in a year they can only contribute $6,000 to the IRA, if on the other hand, your child has no earnings, they cannot contribute to the IRA.
The important thing to keep in mind is that your child needs to have earned an income during that year to contribute to the IRA. Investment income or allowance income doesn’t count; therefore, it cannot be contributed to the Roth IRA for your children.
To be safe, make sure that your child has a W-2 or Form 1099 for the work performed. However, typically these formal documents do not come with some entrepreneurial endeavors such as babysitting, dog walking, and many other juvenile jobs, which means, you have to be extra judicious in the way you handle receipts and records. The records for such jobs should include;
- The nature of work.
- When the job was done (time period.)
- The employer.
- Amount of money paid to your child.
Note: The money cannot be allowance, even if the child has earned it. It can also not be a cash gift given directly to the child. But keep in mind that even though allowances are never allowed, you can pay your child for the work that is done around the house as long as it is legitimate and it has been paid with the current market rate.
Additionally, it would really help the child if they do similar work repeatedly, not just for you, but for other people too. If you pay them for dog walking, make sure that they can do it for the neighbors too.
Is it possible for other people to contribute to the account?
Direct contributions to the Roth IRA for your children are possible as a gift. Since the Roth IRA can be invested in any sort of asset, it will perform much better than savings in a bank account or in the bond market. In most cases, most custodians or parents will match up their children’s earning and make the contribution to the accounts themselves.
Whatever approach that you will choose, IRS will not so much look into who is making the contributions to the account, but remember, you cannot exceed the child’s income for the year.
