Family · December 30, 2020

When and Why to Consider a Roth IRA for Your Kids

Whether you want to give your kids an early start on their nest egg or give them extra savings for college, a Roth IRA can help. You can use this type of account for more than just retirement savings. Opening a Roth IRA for your kids can also be a great way to save for college and other future expenses.

For many families, a Roth IRA may be a better savings choice than a 529 plan, the tax-advantaged savings account for higher education costs. That's because you can use the IRA for more than just education expenses. You can withdraw Roth IRA funds anytime without penalty fees, if you're using the money for retirement or college. It's also possible to put up to $10,000 from your Roth toward the purchase of a first home. While not everyone ends up in college, most will have a financial need for a home purchase or retirement.

Roth IRA funds can also be used without penalty if the account holder becomes disabled or needs to pay for medical expenses or health insurance while unemployed. That means a Roth might give you more flexibility to give your kids a head start on their savings and increase their financial stability, no matter what happens or what path they choose to take in life.


Roth IRA rules to know

There's no age limit for opening up a Roth IRA, as long as your child is earning some form of income. That doesn't mean they have to be a salaried worker, however. A child being paid for modeling work or a teen taking their first job as a babysitter can contribute these wages to a Roth IRA. There are a few income restrictions to know about that apply to Roth IRA holders of any age.

  • There's a $6,000 contribution limit. No matter how much your child earns, they can only contribute $6,000 per year.
  • They can only contribute up to what they earn. If your child makes less than $6,000 per year, the maximum they can contribute is their income level. For example, if your teen earns $2,000 for babysitting, they can contribute a maximum of $2,000.
  • You can match their contributions. The parent or another adult can match the child's contributions up to the contribution limit. However, the parent can't contribute more than the amount the child contributes.

How to set up a Roth IRA for kids

Setting up a Roth IRA for your child is simple, but it needs to be done by a parent, grandparent or guardian, despite the fact that the income is earned by the child. You'll just need your and your child's Social Security numbers, birthdates and other personal information.

If your child earns money but doesn't file a W-2, keep track of earnings and Roth IRA contributions just in case the IRS has questions later.

If your child earns any income, even in small increments from babysitting, walking dogs or another task, a Roth IRA might be worth considering for your family financial plan. Investing their hard-earned money now will prepare them better for the future expenses to come.

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