IRAs

Roth IRAs for Kids

Children with earned income can start start saving for retirement with one of these tax-advantaged accounts.

My 16-year-old daughter earned money this year by teaching piano lessons to younger children. Can she set up a Roth IRA? Any suggestions where?

Yes, children of any age who have earned income from a job can contribute to a Roth IRA. Investment income doesn’t count and neither does an allowance. Keep good records of her earnings, including a log of the dates and hours she worked, who paid her, and how much.

A Roth IRA is a powerful tool that can leverage small contributions and decades of tax-free growth into a sizable stash of tax-free money in retirement. Plus, Roth IRA owners can withdraw their contributions (but not their earnings) at any time without paying taxes or penalties.

Your daughter can contribute up $5,000 to a Roth IRA for 2010 (or up to the amount she earned for the year, if it is less than that), and she has until April 18, 2011, to make her 2010 contribution. And while your daughter may not want to part with all of her earnings, you can make up the difference. It doesn’t matter who contributes to her IRA, as long as it doesn’t exceed her earnings for the year. And money destined for an Roth IRA contribution can make a great holiday gift from parents and grandparents.

Some brokerage firms and mutual fund companies are more willing than others to open Roth IRAs for minors. You may want to contact the firms where you already have accounts, which could give you a break on fees.

TD Ameritrade offers IRAs for minors with no investment minimums or annual fees. The IRA can invest in anything available in TD Ameritrade’s brokerage accounts, including more than 100 commission-free exchange-traded funds. There is a special form for IRAs for minors, similar to a custodial account, which lists the information for both the teenager and the parents.

Scottrade offers IRAs for minors with no annual fees or set-up costs, and a minimum investment of $500 for new accounts. A parent or guardian must act as a custodian for the account until the minor reaches the age of majority. When filling out the forms for a custodial IRA, the minor is considered the applicant and the parent (custodian) is the co-applicant.

Charles Schwab allows minors with earned income to open a Roth IRA with no fees and a minimum balance of $100. The account offers all of the benefits of a Schwab ONE brokerage account, with access to the advice and full range of investment options offered by Schwab.

Investors of any age can open an IRA at T. Rowe Price, but if they are under age 18, an “authorized person” over age 18 (usually a parent or guardian) must be designated to sign the IRA new-account form. The minimum initial investment is $1,000, which is waived if you sign up for a $50 monthly automatic asset builder. There is no set-up charge or annual fee for a mutual fund account with a balance of at least $5,000; or an individual with a balance of at least $50,000; or a household with a balance of at least $100,000 invested with T. Rowe Price. Otherwise, a $10 annual fee is charged.

A minor can establish an IRA at Vanguard as long as a parent or custodian signs the adoption agreement. The minimum initial investment is $3,000 for most funds, including the target-retirement funds; however, the investment minimum is just $1,000 for the STAR Fund (a fund-of-funds). There’s a $20 annual fee for accounts with less than $10,000, which can be waived if the investor signs up for e-delivery of statements and reports.

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