by Victoria 

How Your Minor Child Can Contribute to a Roth IRA


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written by: victoria mcgruder, cpa, cpwa®

A Roth IRA is one of the best investment vehicles out there to take advantage of tax FREE growth over the course of your lifetime.

A Roth IRA is not an investment. It is an investment account that provides significant tax benefits for the funds invested within it.

Tax free growth is POWERFUL and eye opening when you look at the impact on an account over a long period of time.

Here is An Example of the Power of Tax Free Compound Growth

Many of us do not know what it’s like to receive income tax free. Imagine receiving a lump sum of money or having access to a lump sum of money, with no tax consequences. No need to file a tax return, no need to report your income. Tax Free.

That is the benefit of a Roth IRA. The earlier you are able to open up a Roth IRA and contribute to it, the more opportunity you are giving your assets to grow over time, build your wealth and never have to pay tax on those funds again. Sounds dreamy if you ask me.

Imagine you open a Roth IRA for the benefit of your child when they are 13 years old….

  1. They earn $2,500 per year babysitting from age 13 – 21.
  2. Your child contributes that $2,500 or you contribute it on their behalf as a gift into the Roth IRA and invest it in a S&P 500 Index Fund.
  3. Your child never adds to the account again.
  4. Assuming a 10% annual rate of return, those funds will be worth close to $1,500,000 by the time your child turns 60.
  5. They will be able to freely take those funds out after this point, tax free, and to use at their discretion.

You contributed $22,500 into the Roth IRA and ended up with $1.5M after 40 years. The beauty and power of tax free compound growth. See below to learn how to make this work for your child!

Roth IRA Eligibility

Not everyone can contribute to this fantastic investment vehicle. There are two requirements that need to be met in order to contribute to a Roth IRA account.

  1. Income Limitations – See this blog post for more information. (This is not relevant for the discussion around a Roth IRA for a child)
  2. You must have earned income – salary, wages, compensation in some form.

So How Can Your Child Contribute?

There are no age restrictions to contribute to a Roth IRA. But as noted above, they will have to earn an income.

There are two main ways for your minor child to earn an income and contribute to a Roth IRA:

  1. Through their own earnings:
    • Babysitting, dog walking, pet sitting, a summer job, life guarding, etc. to name a few.
    • Keep in mind – your child can keep the money that they earn and as the parent, you can contribute the funds to the Roth IRA on their behalf as a gift so long as they have earned the money.

  2. Through wages or pay from a parent owned business
    • If you are a business owner, you are able to employ or pay your child directly for their time and work for the family business. See below for a few examples.

Another tip here: If your child is not required to file a tax return because their income is too low and so it is not required, then I would strongly advise you keep a log and track the child’s time and earnings to fully support the contributions made to the Roth IRA.

If You Are a Business Owner with a Child

If you are a business owner with children, there is a big opportunity here for you to reasonably employ your children and set up a custodial Roth IRA account for their future benefit.

There are lots of ways you could legitimately employ your child to help with the family business. Here are a few:

  1. Stamping envelopes
  2. Organizing Retail Space
  3. Cleaning the office
  4. Running errands for business supplies or to the post office
  5. Modeling your logo or merchandise to be advertised on your website (this is a great way to legitimately employ younger children)

You could pay them a reasonable wage for their time and $6,000 worth of their income could be used to fund their custodial Roth IRA account.

Another benefit to you as the employer, is that if your child was on payroll, you would also get a business tax deduction for their earnings.

The Steps to Take to Open a Custodial Roth IRA

  1. Your child earns an income from one of the various ways noted above.
  2. You would then open a Custodial Roth IRA investment account in your child’s name. Not all brokerage firms offer this type of account but I know Fidelity and Charles Schwab do.
  3. Fund the account directly from the child or from the parent as a gift.
  4. Invest it and continue to reap the rewards of those tax free earnings for years to come.

After Contributing to the Account, Then What?

As the custodian of the account, you will have control over the investments and the activity in the Custodial Roth IRA until the child becomes of age, either 18 or 21 depending on the state you live in. Then at that point, your child will then have control and ownership of the account.

They will be able to freely take out any contributions made into the account at any time, penalty and tax free.

If they want to take out the growth and the earnings from the account, they will have to wait until they are 59 1/2 to do so penalty and tax free.

This is by far one of the best ways to set your child up for future financial success!

Learn more about Roth IRAs and how they work in a past blog post.

Please send this to a friend if you found it helpful!


Blog Post: All About Roth IRAs & Why I Love Them

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I'm a financial advocate, coach, and blogger on a mission to help you build wealth with confidence! 

Having worked closely with countless clients over my 14 year career, I've gained a very deep understanding of money management and effective planning strategies in guiding individuals and families towards financial success. Now, I want to share that wealth of knowledge and insight to empower YOU to take control of their finances, make well-informed decisions, and create a life of abundance without the stress of finances looming over you. I'm so glad you're here! 

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