Roth IRAs for KidsSubmitted by Mission Financial Planning on July 10th, 2020
There is no minimum age on Roth IRAs, only the requirement that a person needs to have earned income*. OK, it’s true that babies have a hard time finding work, but as kids get summer jobs or are able to work in a parent’s business, a Roth is a great tool for savings.
Why open a retirement account for someone who is just a kid?
Kids are usually in a low (maybe zero) tax bracket. The objection many adults have to making Roth contributions is that contributions are after-tax; they offer no tax deduction. But when kids are just getting started, or are early in their career, making an after-tax contribution isn’t as much of a tax-sacrifice.
Even better, Roth IRAs grow tax free – when you’re a kid, that’s a lot of potential years of tax-free growth.
Can’t convince your kid to invest their summer job money in a Roth? Consider funding it for them**. Roth contribution limits are lower than the giving limits for gift tax purposes, so no gift reporting required. You can fund as much as they earned, up to the maximum of $6000***.
The contributions you make to Roth IRAs can be withdrawn at any time and used on anything, no taxes or penalty. We wouldn’t consider Roth IRAs a good emergency fund, but if there was an absolute emergency, the contributions are there for your child at any age.
The growth is another story, if the IRA has been in place less than 5 years, it is taxed and penalized.
If the Roth has been open more than 5 years, and the owner is older than 59.5, withdrawals are tax and penalty free.
Kids (under 59.5) who have had a Roth for more than 5 years can still have some access in several special situations.
No taxes on the growth, no penalties:
First Home: Up to $10,000 can be pulled without taxes or penalties for buying a first home (a spouse can do this too, to get a total of $20,000 toward a down payment)
In cases of disability.
For the beneficiaries upon death.
No penalties, but you pay taxes on the growth:
Education: Roth IRAs can be used for paying college expenses for you, your spouse, your children or grandchildren.; the contributions come out tax-free, the growth is taxed. Extra bonus: Roth IRAs aren’t counted on the Free Application for Federal Student Aid (FAFSA) when calculating the family’s contribution to college expenses.
Adoption: You can avoid penalties on a withdrawal of $5000 used for adoption.
Medical: Unreimbursed medical expenses in excess of 10% (lower % when you’re older)
Roth accounts can be used to pay for medical insurance while unemployed.
To pay an IRS levy
Scheduling payments over a lifetime.
There are advantages to Roth IRAs later in life too; no Required Minimum Distributions are required from Roth IRAs.
When can a child can qualify to make a Roth IRA contribution?
The hurdle to opening this account is about having earned income, not age, and with more accessibility than other retirement accounts it can be a smart move.
Let's talk if you have questions about a Roth IRA for your kids.
*Earned income is defined by the IRS as taxable income and wages — money earned from a W-2 job, or from self-employment gigs like baby-sitting or dog walking.
**Roth IRA providers typically require an adult to open and manage a custodial Roth IRA on behalf of a minor.
***If you want to fund a Roth for yourself, you can contribute up to $7000 if you’re over 50 (2019 and 2020 limits); some income restrictions apply.