What is a Roth IRA for kids, and how does it work?
Source
American Shipper
Post Date
02/24/2025
?Your child will need to have earned income to set up a Roth IRA ? ?An allowance for doing chores around the house generally doesnt count ? ?The longer you invest, the more money youll have due to compound interest
A Roth IRA is one of the most powerful retirement accounts, and even kids can contribute to them. Savers love Roth individual retirement accounts (IRAs) because contributions and earnings grow tax-free. You?l pay after-tax dollars on the front , but when it? time to retire (after age 59 1/2), you can withdraw your money tax-free. A custodial Roth IRA offers the same benefits as a Roth IRA except it? set up for a child, and an adult, typically a parent, manages the account until the child reaches legal adulthood. There is no minimum age to set up a Roth IRA for your child, but they do need to have earned income. That money could come from a summer job scooping ice cream or a more informal gig like babysitting or walking dogs. A recent CNBC op-ed dubbed the Roth IRA the ?olden egg?savings vehicle for young people. Here? what to know. What is a custodial Roth IRA? A custodial Roth IRA is a retirement account for minors that allows for tax-free growth. It provides all the benefits of a regular Roth IRA, but it? geared toward kids and requires an adult to set up. The adult, called the ?ustodian,?manages the contributions and the investments, but the account is owned by the minor. When the minor reaches a certain age, typically either 18 or 21 in most states, the assets must be transferred to a new account in their name, according to Fidelity. Like any IRA, the account owner (in this case, the minor) must have earned income. So unless your baby is starring in a television commercial, you?l have to wait until your child is old enough to make money on their own to an account. It? easy to set up an account online, and you?l just need to provide Social Security numbers, birthdates and other personal information for you and your child. What are the limits? There is no minimum age to a Roth. Any child 17 or younger can contribute to one as long as they earn income. It doesn? matter if they?e working as a bagger at the local grocery store or mowing lawns and babysitting; it? still earned income. However, if your child is not filing a tax form, it? a good idea to keep track of their earnings in case the IRS asks questions. Which tax bracket am I in, and how much is the standard deduction? The IRS defines earned income as all the taxable income and wages you get from working for someone else, yourself or from a business or farm you own. An allowance for doing chores around the house isn? considered earned income ?neither is a cash gift. As with other IRAs, there are contribution limits. The limit for a Roth IRA for kids in 2025 is $7,000 or their total earned income, whichever is less. So, if a child makes $2,000 walking dogs this year, they can contribute a maximum of $2,000. Your child can? contribute to a Roth IRA if they make over $165,000 in 2025, but the parent? income doesn? matter. The IRS only cares about the child? income. Can a parent contribute to their child? Roth IRA? Anyone can contribute to a custodial Roth IRA as long as the minor has the income to match. For example, let? say your child makes $1,500 mowing lawns. A parent, grandparent, or anyone else could contribute up to $1,500 into a Roth IRA. Again, it? best to keep a reliable record of your child? earned income. That could mean keeping a spreadsheet with their earnings or logging their work in a journal. Matching your child? contributions can be a great way to incentivize good saving habits. After all, it may be hard to convince your 16-year-old to put away their hard-earned lifeguard money for several decades. What are the benefits? Roth IRA contributions are made with after-tax dollars, so you don? get an immediate tax break, but you can withdraw contributions tax and penalty-free at any time. The investment earnings in your account also grow tax-free. The main benefit of setting up a Roth IRA for your child is time. The longer money remains invested, the more it can grow through compound interest. It may not seem like much, but a few years can make a big difference when it comes to the size of your nest egg. For example: ?A 16-year-old who contributes the Roth IRA maximum each year could have over $3 million saved by age 65, assuming a 7% annual return ? ?A 22-year-old who does the same would have roughly $2 million, about $1 million less, under the same conditions A Roth IRA generally makes sense for those who will be in a higher tax bracket in retirement than they are today because they won? have to pay taxes on qualified distributions. That? why a Roth IRA can make even more sense for children, who are more likely to be in a lower tax bracket and, therefore, able to contribute money at a lower tax rate. They win on both s.
