Opening a Roth IRA for a child may be a wise investment choice. The longer anyone can keep money invested in a tax-free vehicle, the greater the wealth accumulation. There is no minimum age requirement to open a Roth IRA for a child. Many banks, brokers, and mutual funds will let you set up a custodial Roth IRA if you child is a minor (under age 18).
The child must have earned income. This can come in the form of wages and/or self-employment income such as baby sitting and yard work. A child can also work for a parent’s business. Contributions to a Roth IRA account are limited to the amount of the child’s earned income up to a maximum contribution of $5,500 for 2016. If the child has self-employment income then good records should be kept. The records should include:
- The type of work
- When the work was done
- For whom the work was done
- How much the child was paid
The contribution does not have to be made from the child’s wages. For example, a child could earn $1,000 and spend it all and the parent could make a $1,000 Roth IRA contribution on behalf of the child.
The contributions can be taken out tax free for any reason. The earnings, interest, etc. on Roth IRA contributions can be taken out tax free after age 59½. There are certain situations where the IRS will allow you to withdraw earnings without tax and penalty, including qualified higher education expenses. Certain hardship circumstances such as permanent disability also allow earnings to be withdrawn tax and penalty free.
Contributions to a Roth IRA are not tax deductible; however a child’s income is often too low for a tax deduction to be beneficial.