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A ROTH IRA for a Minor? Can you DO that?

Yep. And it’s a great idea. Now don’t get all wound up and start opening ROTH IRA’s for all your kids/grandkids when they are born. To be eligible to contribute to the ROTH IRA, the minor child must have EARNED income. A generous gift from grandma, interest/dividends, or allowance savings are not considered earned income. But flipping burgers at McDonalds, stocking at Tom Thumb, babysitting and mowing lawns are definitely earned income. For jobs that don’t provide a W-2 (i.e. babysitting), the minor would need to keep detailed records.

You would open a ROTH IRA for a minor as a Custodial Account. When the minor turns 18 (in Texas), the child has full authority over the account. Why a ROTH IRA? Most likely a minor child will really not benefit from the up-front tax deduction of a Traditional IRA. So why not start early building a retirement resource that has tax-free withdrawals if taken after age 59-1/2? A bonus is, however, that withdrawals taken before 59-1/2 are not penalized if used for qualified higher education expenses and up to $10,000 towards a down payment on a first home. Kinda handy. (And kinda complicated, but worthwhile.)

So what kid in his right mind would stash his hard earned money into a ROTH IRA, when the whole point of working was to get money for clothes and techy stuff? Here are some thoughts:

  • Don’t contribute EVERYTHING…just some. Great way to form saving habits.

  • Use a “matching program”: For every $50 the minor contributes, the parents contribute $30 or some other percentage. For the minor, this is good mental preparation for contributing to a 401K when the time comes. Total contributions, however, cannot exceed the amount of the child’s EARNED income nor exceed the annual contribution limit (2022 limit = $6,000).

There’s a saying in the investment world: “It’s TIME not TIMING.” Kids who start early have time…and it’s a great time to generate conversations about finances, saving, planning, priorities—all those things grown-ups have to handle. So give ‘em a chance to practice before they grow up!

We can’t cover all the ins and outs of IRAs in this space. But I wanted to get your cork a-bobblin’ about a minor ROTH IRA. So give us a call when you’re ready to discuss further. --Lois Russell

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