Money Smart Kids
Can Your Child Open a Roth IRA?
Find out if your kid qualifies for this tax-sheltered savings plan. Plus, how much to contribute and which companies will open an account for a minor.
By Janet Bodnar, Editor, Kiplinger's Personal Finance
January 30, 2008
I read in Kiplinger's magazine that in 2008 kids can make a contribution to a Roth IRA of up to $5,000 or 100% of their earned income, whichever is less. Does that include any kind of earned income? For example, if my son has a job where he receives a W-2 form, and he also mows laws on the side and is paid in cash, can he include the income earned from both jobs? If so, how do you record the cash earned from mowing lawns?
Yours is one of the most common questions I get regarding Roth IRAs for kids. So it's worth emphasizing that in order to open a Roth the critical factor is earnings: A child can have a Roth IRA as long as he or she has earned income from a job. Birthday gifts from grandparents or interest on a savings account don't count, nor does an allowance for doing general household chores.
A W-2 form is the most straightforward proof of earned income. But earnings from a job such as mowing lawns or baby-sitting qualify, too.
The best way to handle your son's income is to keep careful records of each job, when it was done, for whom, and how much he was paid. And it would make a stronger case if he mowed lawns not just for you but for other customers as well.
How much to contribute
My daughter earned about $1,500 last summer working as a lifeguard. Is there still time for her to contribute to a Roth IRA for 2007? If so, can I add an additional $2,500 to bring her up to the $4,000 contribution limit for 2007?
Yes, your daughter has until April 15 to contribute to a Roth IRA for 2007. But she can contribute only the amount of her earnings -- in this case, $1,500.
If she has already spent the money, or if she's saving it for college or some other goal, you can come up with the cash to fund the account. But you can't kick in more than her actual earnings.
An open door for minors
Where can I open a Roth IRA for my 15-year-old son? I've tried a couple of financial companies, but I've been told that he has to be 18.
Some companies -- notably Fidelity -- have a policy of not opening IRAs for minors. But plenty of other banks and investment companies do.
Among brokerage firms, Charles Schwab, E*Trade, Muriel Siebert, Scottrade and TD Ameritrade welcome IRAs for kids, as do mutual fund families American Century, T. Rowe Price and Vanguard.
Also on the list: Bank of America, Citibank and PNC.
Minimum investments vary. Schwab will open a kid's IRA with as little as $100; TD Ameritrade and Muriel Siebert have no minimums. At American Century and Vanguard, the minimum is the same as the minimum investment for the fund you want to buy.
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Reader Comments (5)
Posted by: goldi at 03/05/2008 08:57:27 PM
Opening a Roth IRA for your child not only makes good $$$ sense but also is a great way to teach them valuable lessons on saving and investments. If this intrests you then you must read a little book called, "It's Your IRA!" A beginners guide to investing in an IRA...
Posted by: Ryan at 12/09/2009 02:30:49 PM
In light of what you said about chores and such, what if my daughter incorperated herself as a house keeping company and provided me with a receipts for services rendered. Could that count as income for IRA purposes?
Posted by: Logic at 02/17/2010 09:02:35 PM
Would it really be cost effective to have your daughter "incorporating herself as a housekeeping company" and provided you with receipts to invest a few thousand into a Roth IRA on her behalf?First there is the time and expense, then if audited it would be tough to not get penalized, but if you didnt is it really worth any of it? Just going by what is realistic and reasonable to start off with will give you a good gauge on whether you should bother or not. There are other accounts that are still very beneficial such as a coverdell ira, 529, etc. Then a Roth IRA once they have a newspaper route or summer jobs,... with earned income,...
Posted by: Raymond Seigman at 06/06/2010 04:26:45 AM
Hi, I am 14 years old and i have put a lot of time into looking at investing for the greater wealth of my future and i have seen the minimum deposit for creating the roth account and i was looking at my credit union and they have a high minimum capital should i open a roth with a different bank or should i save my money and wait till i have the capital? i am also wondering about the yearly deposites on the roth account and what if i dont work one year does the account get shut off or does it stay the same and not gain intrest that year? one more thing what should i do with the odd job employers should i keep a log of all of the work i do and have them sign it at the end of the job? and if i log the odd jobs do i need to report them to the IRS or just to the bank where my roth is acquired
Posted by: Jamie Shreeves at 08/03/2010 04:05:38 PM
First off I am pretty impressed a 14 year old is considering an IRA. I would say that you might want to consider opening a separate account at a different financial institution if you want to open your IRA. If you don't work one year, don't sweat it, the financial institution will hold your money just like if you had it in a bank account. If you are doing odd jobs for neighbors and you want to put that money in the IRA then yes you will need to report those earnings to the IRA. Good luck in your future en devours and from the sound of it you are on the right track!