ira for kids -- African American father and teen leaning against a car

2021-10-22

Setting Up a Roth IRA for My Child

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Did you know that you can set up an IRA (individual retirement account) for your kids? It’s never too early to start planning for retirement! Thanks to the flexibility of Roth IRAs, any child who has earned income can open a Roth IRA. Parents and guardians can even start a custodial IRA for their children who are under 18.  

How Do I Open a Roth IRA for a Minor? 

One of the first questions we usually get about Roth IRAs for minors is the minimum age requirement. If you want to start a custodial IRA for your child or grandchild, we have good news! There is no age limit for opening a Roth IRA. However, there are few stipulations you will need to follow.

Opening Roth IRAs for Kids

  1. If the child is under the age of 18, a parent or guardian will need to open the Roth IRA on their behalf. Starting a custodial IRA is not very different from opening an IRA for yourself—the main difference is that the account will be in the child’s name and not in yours. 
  2. The child must have some type of earned income in order to open a Roth IRA. Their “earned income” could be from a job where they receive a W-2, or from money earned through self-employment gigs like babysitting, dog walking, or mowing lawns. 
  3. The minor can contribute up to $6,000 each year or the total amount they earned during the year—whichever is the smaller amount. If a minor makes $1,500 a year mowing lawns, that is the maximum amount that they can contribute to the Roth IRA. 

What Are the Benefits of a Custodial IRA?

Getting kids involved in the money-saving process early has lots of advantages. From teaching children the value of money at an early age to setting them up early for retirement, a Roth IRA for minors can provide kids with a head start they’ll be thankful for as they get older. 

Low or No Tax Rate

Money contributed to Roth IRAs has already been taxed. Because kids generally do not make a very large income each year, their tax rate will be very low. When they start withdrawing funds after retirement, they will not have to pay any further taxes.

Withdraw as Needed

Unlike some other types of retirement savings accounts, money can be withdrawn from a Roth IRA account at any time. Children can take money out of their Roth IRA account to pay for their first car or for college expenses. However, they may be subject to a 10% early withdrawal penalty or have to pay taxes on the funds removed. Make sure to speak with an experienced tax attorney before allowing a child to make a withdrawal. 

Makes Kids Financially Savvy

Adults know that saving money can be hard. Teaching kids the value of saving money early in life will make them better stewards of their hard-earned dollars later on. As they watch their Roth IRA grow, children will learn how to use important financial tools that can help them retire more easily when the time comes. 

Open a Roth IRA for Minors at Phelps LaClair

Do you have questions about opening a Roth IRA for kids in Arizona? The experts at Phelps LaClair are ready to help! Give us a call at (480) 892-2488 or contact us here to schedule an appointment. 

Photo by Any Lane from Pexels

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