Can a Parent Start a Roth IRA for a Child?
Short answer
Yes, a parent can start a Roth IRA for a child by opening a custodial Roth IRA, as long as the child has earned income. The parent manages the account until the child reaches adulthood. Contributions are limited to the child’s earned income for the year, allowing the child to build savings with tax-free growth and gain valuable financial experience.
What Is a Roth IRA in Simple Terms?
A Roth IRA is a retirement savings account funded with money you’ve already paid taxes on. This means when you withdraw the money in retirement, you don’t pay taxes on the withdrawals or the gains. For children, a Roth IRA can be an excellent way to start saving early because the money can grow tax-free for many years.
The main rule for contributing to a Roth IRA is that the account holder must have earned income. Earned income means money earned from working—such as wages from a job, freelance income, or self-employment earnings. Money received as gifts or allowance does not count as earned income. So, if a child earns $2,000 babysitting, they can contribute up to $2,000 to their Roth IRA that year, but not more.
The IRS also sets an annual maximum contribution limit for Roth IRAs. For example, if that limit is $6,000, the child’s contribution can’t exceed the lesser of the two amounts: their earned income or $6,000. This ensures contributions reflect actual work earnings.
How Can a Parent Start a Roth IRA for Their Child?
Parents cannot simply open a Roth IRA in their child’s name without restrictions. Instead, they open a custodial Roth IRA—an account held in the child's name but managed by a parent or guardian until the child reaches the age of legal adulthood, which varies by state (usually 18 or 21).
Steps to Open a Custodial Roth IRA for a Child
- Confirm the Child Has Earned Income: Collect proof such as pay stubs, W-2 forms, or tax returns showing the child earned money during the year. For example, if a 15-year-old earns $1,800 from summer lawn mowing, that amount sets the maximum they can contribute that year.
- Choose a Financial Institution: Look for banks, credit unions, or brokerage firms that offer custodial Roth IRAs. Compare fees, minimum deposits, and investment options. Online brokers often provide easy application processes and low fees.
- Prepare Required Documentation: You will need the child’s Social Security number, proof of earned income, and identification for the parent or guardian opening the account. Some institutions may also require the child’s birth certificate.
- Open the Custodial Roth IRA Account: The parent completes the application as the custodian. The account is legally owned by the child but controlled by the custodian until adulthood.
- Make Contributions: Deposit money up to the child’s earned income or IRS limit, whichever is lower. For example, if the child earned $1,800, the custodian can contribute up to $1,800 that year.
- Select Investments: Choose long-term growth investments such as mutual funds, index funds, or ETFs. Parents may want to involve the child in investment decisions to teach them about investing.
- Monitor and Educate: Keep track of account statements and contribution limits. Use the account as a teaching tool to explain saving and investing principles.
Example:
If a 16-year-old earns $3,000 babysitting and helping neighbors, a parent can open a custodial Roth IRA and contribute up to $3,000 that year. Assuming a 7% average annual return, this contribution could grow to tens of thousands by retirement age.
Why Does Starting a Roth IRA for a Child Matter?
Starting a Roth IRA early has several advantages:
- Tax-Free Growth Over Many Years: The earlier money is invested, the longer it can grow without being taxed, which can significantly increase retirement savings.
- Learning Financial Responsibility: Managing a Roth IRA helps children understand work, saving, and investing. It encourages good money habits by combining earned income with saving.
- Flexible Withdrawals: Contributions (not earnings) can be withdrawn anytime without penalty, offering some financial flexibility.
- Encouragement to Work: Since contributions require earned income, children are motivated to work and earn money.
- Building a Head Start on Retirement: Saving early can reduce the amount needed to save later in life for a secure retirement.
For parents, it’s a way to help their children develop financial independence and potentially reduce future financial stress.
What Common Confusions Exist About Roth IRAs for Kids?
Some common misunderstandings and clarifications include:
- Gifts Can’t Substitute for Earned Income: Parents cannot simply gift money and contribute it on behalf of the child if the child has no earned income. Contributions must be based on documented earned income.
- Custodial Roth IRA vs. Regular Roth IRA: A custodial Roth IRA is controlled by the parent until the child reaches adulthood. A regular Roth IRA is opened and controlled by the individual.
- Roth IRA vs. Traditional IRA: Roth IRAs use after-tax contributions with tax-free withdrawals later, while traditional IRAs use pre-tax contributions but tax withdrawals. For children, Roth IRAs are usually better since their current tax rate is likely low.
- Parents Can't Transfer Their Roth IRA to Children: Roth IRAs are non-transferable during life. Parents can name children as beneficiaries for inheritance but cannot transfer ownership.
- Opening a Roth IRA for Babies: Babies must have earned income to qualify, which is uncommon unless from acting or modeling jobs.
Understanding these points can prevent errors when opening and funding a custodial Roth IRA.
What Are the Detailed Steps to Open a Child’s Roth IRA?
Step 1: Document Earned Income
The child must have earned income from work such as:
- Part-time jobs (e.g., retail, food service)
- Freelance work or gig economy jobs (e.g., lawn care, tutoring)
- Self-employment (e.g., selling crafts, pet sitting)
Keep thorough records such as pay stubs, signed contracts, or invoices. If self-employed, keep track of expenses and income for tax filing.
Step 2: Choose the Right Financial Institution
Evaluate options based on:
- Fees and minimum balances
- Investment choices (mutual funds, ETFs, stocks)
- Ease of opening a custodial account
- Customer service and educational resources
Many online brokers specialize in custodial accounts and provide tools for beginners.
Step 3: Gather Necessary Documents
Prepare:
- Child’s Social Security number and birth certificate
- Parent’s government-issued photo ID
- Proof of the child’s earned income (W-2, 1099, or tax returns)
Step 4: Open the Account
Complete the application as the custodian, supplying all required information. The parent controls the account until the child reaches adulthood.
Step 5: Fund the Account
Contribute an amount up to the child’s earned income or IRS limit. For example, if a child earned $2,500, the custodian can contribute up to $2,500 that year.
Step 6: Choose Investments
Start with diversified investments designed for growth over many years. Consider index funds or target-date funds appropriate for retirement savings.
Step 7: Maintain and Review
Regularly review account statements with the child. Discuss how investments perform and the importance of long-term saving. Keep records for tax time.
What Should Parents Do Next?
If you want to open a Roth IRA for your child:
- Discuss Work and Income: Help your child find opportunities to earn income legally and keep records.
- Research Custodial Roth IRA Providers: Compare fees, features, and investment options.
- Open the Custodial Roth IRA Early: The sooner it’s opened, the more time the money has to grow.
- Involve Your Child in Management: Teach them about saving and investing through hands-on experience.
- Keep Records Organized: Maintain documentation for contributions and income each year.
- Seek Professional Advice: A financial advisor can provide tailored guidance if desired.
Learning more from resources like Can I Open a Custodial Roth IRA for My Child? can provide additional clarity and steps.
How Does a Custodial Roth IRA Differ from Other Accounts Parents Might Consider?
| Account Type | Owner | Tax Treatment | Contribution Limits | Purpose |
|---|---|---|---|---|
| Custodial Roth IRA | Child (parent manages) | Contributions after-tax; tax-free withdrawals after retirement age | Limited to child’s earned income or IRS max | Long-term retirement savings |
| Custodial Savings Account | Child (parent manages) | Interest is taxable as income | No limits | General savings, no tax advantages |
| UGMA/UTMA Custodial Account | Child (parent manages) | No special tax advantages | No limits | Savings/investments for child, not retirement-focused |
| Parent's Roth IRA | Parent | After-tax contributions; tax-free withdrawals | Limited to parent’s earned income | Parent’s retirement savings; cannot gift account to child directly |
Choosing a custodial Roth IRA promotes early retirement saving with tax benefits and legal ownership by the child, unlike other savings accounts without tax advantages or retirement focus.
Frequently asked questions
Can a child contribute to a Roth IRA without earned income?
No. Contributions must be based on the child’s earned income for the year. Gifts or allowance money do not qualify as earned income for contributions.
When does the child gain control of their custodial Roth IRA?
Control transfers to the child when they reach the age of majority, usually 18 or 21 depending on state law. At that time, the child can manage or withdraw funds freely.
Can parents contribute to their own Roth IRA and then gift that money for their child’s Roth IRA?
Parents can gift money to their child, but the child may only contribute to their Roth IRA up to their own earned income. Contributions must come from the child’s earned income, not the parent’s.
What if the child doesn’t use the Roth IRA funds right away?
The money remains invested and grows tax-free until the child withdraws it. Early contributions can grow significantly by retirement age.
Can a Roth IRA be opened for a baby or infant?
Only if the baby has earned income, which is uncommon unless from acting or modeling jobs. Roth IRAs generally start when children begin earning income.