Can Children have a Roth IRA?

Kids will be out of school for the summer, working summer jobs.  Younger kids can mow lawns and babysit.  What will they do with their earnings?  Hang out with their friends at the mall or go to the movies, save toward the latest video game or a car.  It is never too early to start kids saving towards their future.  

Can children have IRAs?  There is no minimum age for owning an IRA.  With the power of compound interest, saving tax-free in an IRA from childhood can provide a significant head start on financial security.  Saving $7,000 in an IRA annually from age 14 through 24 and earning 7% annually provides over $1 million at age 61 – even without contributing after age 24.  

Open a Roth IRA

A Roth IRA for kids is a custodial Roth IRA.  A custodial account is one that an adult, usually a parent or grandparent, opens and manages for a child.  The child gets full control of the account once they are 18 in most states. 

Fund the Roth IRA

You can contribute $7,000 in 2024 to a Roth, or the amount of earnings for the year, whichever is less.  Kids may not be interested in ‘locking’ up their wages.  Parents or grandparents can make the contribution.  The source of funding doesn’t matter.   The child just has to have earned income.  

Roth IRA Accounts are Accessible

While Roth IRAs are generally for retirement, they are accessible before 59 ½.  You can withdraw contributions tax free and penalty free.  

Earnings can only be withdrawn without penalty up to certain limits to pay for college, buy a first home, pay certain medical bills.  Early distributions of earnings that don’t fall under one of the exceptions are subject to a 10% IRS penalty tax plus any applicable income taxes. 

Investments that accumulate in a Roth can be distributed tax free after age 59 ½. Roth IRAs do not have any required minimum distributions.  

Keep Good Records

Parents may want to track the gross earnings of their children. That is the limit for annual contribution or $7000, whichever is less.  

Since you can withdraw contributions tax free, you will want to keep a record of your contributions.  

A Roth IRA is good for many investors.  It is especially good for children, let the power of compounding work for them over their lifetime. 

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