How to Open a Roth IRA For Children

What was the first job you held as a teenager? I worked a few side hustles as a young teen, but began my first official job just after turning 16 years-old. It was at a Little Caesar’s (“pizza, pizza”) in my hometown, and I worked there my sophomore year of high school until football practice began the next summer. It was a pretty good job for a teenager–making pizzas, answering the phones occasionally, and all the Crazy Bread I could eat! Too bad I spent nearly everything I earned that year.

Today parents and working children have access to one of the best investment vehicles around, the Roth IRA. That’s right; you don’t have to be an adult to contribute to a Roth IRA, you just have to have an earned income. Parents may need to help set up the account by opening it as a custodial account. The only limitation for contributions is that they must not exceed the maximum contribution amount established for Roth IRAs in a given tax year, or the teens earned income, whichever amount is lesser.

How To Open a Roth IRA for Children

Let’s assume your 13 year-old makes $2,000 mowing lawns, raking leaves and babysitting this year. Assuming he invests that $2,000 in a Roth IRA, and leaves the money alone, it will grow to $284,000 by age 65, also assuming an average 10% return (source: Not too bad! And just imagine what that number could look like if your teenager continued to invest a couple thousand dollars in that Roth IRA throughout high school. He would easily become a millionaire by retirement age. Wish someone had told me that at 13!

The IRS requires proof of earned income to qualify for contributing to a Roth IRA for children. If your child works for an established organization, he or she should receive a W-2 at the end of the tax year showing how much they earned. If one of your children earns money from babysitting and odd jobs, you will need to keep up with the amounts earned and file a tax return, even if the amount is less than the required minimum for filing. This return is your certification that she did earn that money, and is eligible for a Roth IRA.

Matching Funds From Family

One great gift idea is for family members to match their teenager’s earnings and make the contributions for them. This way all of the teen’s earnings aren’t sent off to the brokerage, and they get to enjoy what they earn.

I actually like some combination of earnings and matching plans for Roth IRA contributions. For example, if a teenager earns $1,000 this year on a paper route, require that $500 be saved for Roth IRA contributions and offer to match the remaining $500 to reach the maximum eligible contribution amount. A matching plan forces the teen to continue to put aside some earnings toward future savings; a skill that is sorely needed from our next generations.

What If They Need the Roth IRA Money Before Retirement?

Roth IRA withdrawal rules allow you to withdraw contributions to a Roth IRA at any time, without penalty. So, if you help one of your children open a Roth IRA, and they need access to that money in their college years, they can always withdraw the contributions, but not the earnings, penalty free. But remember, it’s best to leave the money in your Roth IRA unless children really need it in an emergency.

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