Roth IRAs

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.

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.

Most Popular

11 Good Reasons to Cancel Amazon Prime
Budgeting

11 Good Reasons to Cancel Amazon Prime

You probably aren't using most of the perks tucked into that $119 annual fee -- which you don't need to pay to get the free Amazon shipping you crave.
April 13, 2021
2021 Child Tax Credit Calculator
Tax Breaks

2021 Child Tax Credit Calculator

See how much money you'll get in advance under the new child tax credit rules for 2021.
April 14, 2021
Monthly Payments of the 2021 Child Tax Credit Will Begin in July
Coronavirus and Your Money

Monthly Payments of the 2021 Child Tax Credit Will Begin in July

After doubts about whether it was up to the task, the IRS says it's on schedule to start sending monthly child tax credit payments this summer.
April 13, 2021

Recommended

Social Security Earnings Tests: 5 Things You Must Know
social security

Social Security Earnings Tests: 5 Things You Must Know

If you’re still working and claim Social Security early, your benefits could be reduced, at least temporarily.
April 14, 2021
What NOT to Do with Your TSP: 8 Thrift Savings Plan Mistakes to Avoid
retirement planning

What NOT to Do with Your TSP: 8 Thrift Savings Plan Mistakes to Avoid

Many federal workers saving for retirement in TSPs get tripped up by these common pitfalls. To help maximize your own savings, make sure you steer cle…
April 14, 2021
How to Retire Well During Difficult Times
retirement planning

How to Retire Well During Difficult Times

When the financial environment is challenging (like now) it’s important to plan ahead and avoid some all-too-common retirement mistakes.
April 11, 2021
Don’t Make the Same Mistakes in 2021 – Keep Your Retirement Plan on Track
retirement planning

Don’t Make the Same Mistakes in 2021 – Keep Your Retirement Plan on Track

Looking back at 2020 gives retirement savers a good perspective for how to proceed going forward. Staying flexible and being prepared to change course…
April 11, 2021