Kid’s Roth IRA | Can Teens and Kids Open A Roth?

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In my post on using a Roth IRA to fund kids college, I noticed that a lot of my search traffic was actually wanting to know if the kids could open a Roth IRA – not the parents opening a Roth IRA for kids’ college.  To set things straight, I want to have a post that actually answers the question many folks seem to be asking.

On Thursdays I usually answer a reader’s questions (if you have a question, you can contact me), but today I thought I would answer this common search question …

Can Kids and Teens Open A Roth IRA?

How old does someone need to be to open a Roth IRA?

There is no age minimum for opening a Roth.  The requirement (as far as kids are concerned) is that contributions to a Roth IRA must be from eligible earned income, and contributions cannot exceed annual income.

Translation – if your kid does not earn any money, you cannot open and fund a Roth IRA for them.  However, if your kid has a part time job, she can contribute up to 100% (maximum of $5,000) of her income into the Roth.  Therefore, if she makes $2,000 per year, she cannot contribute more than $2,000 annually. 

Remember: Kids are still subject to the same contribution limits as adults.  So in 2010, a single person cannot contribute more than than $5,000 to a Roth IRA.

However, some brokerages, like Fidelity as an example, may require your child to be 18 years old.  In that case, you need to find a broker who will allow them to open an account.

Can I pay my son or daughter to do work for me so I can get them a Roth?

Due to IRS scrutiny, (and your own integrity) you cannot pay a child to do household chores.  Here are some guidelines:

  1. If you are going to pay a child for services, it must be a job you would otherwise pay someone else to do.  The pay must be in line with a reasonable pay schedule, and there should be records kept. 
  2. It is best if your son or daughter provides similar services to other clients.  If you are the sole client, the earnings are a lot more questionable (can you really prove it is work, not chores?). 
  3. It should be a legitimate work situation.  As such, it would be inappropriate to pay your kid to clean his or her room just so they could use that money to contribute to a Roth. 
  4. The payments should be reasonable considering the service rendered.  You can’t pay little Steve $3,000 to cut the grass.  However, if Steve has a lawn cutting business and records his hours and you pay him something in line with minimum wage, then this would satisfy IRS requirements.
  5. Is your child old enough to deserve a wage?  Paying a six year old to ‘weed’ may be a questionable practice.  However, once a child is around 12+, they can probably start doing some legitimate work outside the scope of regular household chores.  Is someone else first willing to pay your child for their services?  If your neighbor won’t pay your kid to cut the grass, (because he or she is too young) then you probably shouldn’t either. 
  6. Keep the relationship as professional as possible, as transparent as possible, and as legitimate as possible.  Exclude anything that would be considered ‘typical’ household work.

Be sure your child has a record book with who the work was done for, when it was done, and what he or she was paid.

Here are some more common Roth IRA kids questions.

Is a Roth IRA a Good Idea For Kids?

Absolutely.  With a Roth, the younger the better because Roth gains accumulate tax free.

The Roth is very flexible (as compared to other retirement options).  As an example, your kid could use, without fees, money saved in a Roth to help fund their own college.  In addition, your child can deduct up to $10,000 tax free when they buy their first home. 

In many ways, the Roth IRA can serve as a savings account for many different things. 

Remember, if your child wants to buy a car, they cannot use funds, (without paying a 10% penalty on gains) so they would need to do some other saving in a separate account.  Kids should be buying cars with cash because car loan payments are way too expensive. 

Do anyone have a child who has a Roth?  Do you think using a Roth for teens and younger kids is a good idea?

Comments

  1. says

    If Johnny starts charging for cutting he grass, he has set up a business. He’ll need to pay self-employment tax (assuming he is an independent contractor), which is 15.3%. He’ll also need to establish his business, which could be structured as an LLC. And he’ll need to file a schedule C along with his taxes.

    It needn’t be daunting. It would be a great life lesson for a kid.

    http://www.scienceandmoney.com/2009/05/13/why-do-i-need-to-create-an-llc/

    • says

      @Helen
      Thanks for the comment. Yes, he will need to pay self-employment tax. However, I’m not sure he will need to set up a LLC. That seems like a little much for a kid cutting grass. Most 12-16 year olds don’t have enough assets that make it worth getting a LLC.

    • says

      @Joe
      How much does grandpa Joe pay for weeds? I might be interested in the job. Especially if it is anything like Mr. Jason who wants to pay his kid 5 grand to cut the grass.

  2. says

    @Craig
    I garee that if a kid is just pulling a few weeds, an LLC would certainly be too much, but if an ambitious 16-yr-old starts a lawnmowing business, it might be a good idea to protect not just the kid’s assets, but the parents’. The parents are responsible for the actions of a minor child, and could be sued if Johnny’s lawnmower gets out of control.

  3. says

    My parents opened a Roth for me. When I was able to contribute myself, they allowed me choose what I wanted to fill it. It was a great opportunity for my parents to teach me about choosing investments, as well as teaching me to save.

  4. Keith Berg says

    It would be nice to have a list of investment firms that allow a child to open a Roth IRA before they turn 18.
    Must a child file a federal income tax return in order to open and contribute to an IRA ?

  5. Deb says

    Yes! I have been trying to open a Roth for my 16 year old daughter for a few months but have not been able to find any place that will do it!

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