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.

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.

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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.

Janet Bodnar

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.