ROTH IRAs for Kids? (2024)

FAQs

What is the disadvantage of a Roth IRA for kids? ›

Assets in a custodial Roth IRA are considered the child's assets for purposes of financial aid calculations. This can adversely affect eligibility for need-based financial aid, as assets owned by the child are assessed at a higher rate than parental assets.

If your child has a summer or after-school job, you might consider opening a Roth IRA for kids on their behalf. With such an account, your teen can see firsthand how retirement accounts work, while they take advantage of the benefits of saving early in life.

Custodial Roth IRA rules

If a child is 17 or younger and earns income that they pay tax on, they are eligible for an IRA for kids. Just like Roth IRAs for adults, the contribution limit for a Roth IRA for kids in 2024 is $7,000 or the total annual earned income, whichever is less.

Ideally your child should have a W2 or a Form 1099 to show evidence of the earned income. However, there are some instances where this may not be possible so it's important to keep records of the type of work, when the work was done, who the work was done for and how much your child was paid.

You're never too old to fund a Roth IRA. Opening a later-in-life Roth IRA means you don't have to worry about the early withdrawal penalty on earnings if you're 59½. No matter when you open a Roth IRA, you have to wait five years to withdraw the earnings tax-free.

The Mathematics of Roth IRAs

As Orman explains it, if a teen or young adult manages to save $2,500 per year for 50 years, earning a 7% return on an annualized basis, they would end up with more than $1 million in their account.

Account transfer

Once your child turns 18 or 21, depending on where you live, the assets in the custodial Roth IRA must be transferred to a new account in their name. At that point, your child will be responsible for managing contributions and investments and making other account decisions.

Although a child of any age (there's no minimum age) can contribute to a custodial Roth IRA, there is an eligibility requirement: The child must earn income—and pay taxes on the money.

Can parents gift to child's Roth IRA? ›

There are several ways that you can gift a Roth IRA. One is opening a custodial account for a minor. Let's say you're a parent or grandparent who wants to help kids secure their financial futures. Instead of just telling them about Roth IRAs (although that's fine, too), you could start one for them in their name.

Impact on Financial Aid: While contributions to a Custodial Roth IRA do not impact federal financial aid calculations, withdrawals may. This could affect a child's eligibility for certain financial aid programs.

The deadline to make a Roth IRA contribution is April 15th following the end of the calendar year. We often get the question: "Does my child need to file a tax return to make a Roth IRA contribution?" The answer is "no".

Earnings distributed will be taxed as income, but there will be no penalty. No age restrictions. Kids of any age can contribute to a Roth IRA, as long as they have earned income. A parent or other adult will need to open the custodial Roth IRA for the child.

One disadvantage of the Roth IRA is that you can't contribute to one if you make too much money. The limits are based on your modified adjusted gross income (MAGI) and tax filing status.

In general, the Roth IRA is the IRA of choice for minors who have limited income now. By the same logic, it's often recommended for adults who expect to be in a higher tax bracket in the future. "If a child keeps [a Roth] until age 59½ (under today's rules), any withdrawal will be tax-free.

You Can Leave the Whole Roth IRA to Your Heirs

3 Because you already paid the income taxes due on that money, the Internal Revenue Service (IRS) doesn't care when you use it.