Give your kids a head start on retirement with a Roth IRA

by Badgley Phelps | Apr 01, 2019

Do your minor children have earned income from a part time job? While often overlooked, a Roth IRA can be an excellent way to give your children a head-start on retirement savings and investment management education.

There is no age limit on when someone can open a Roth IRA. For a minor child, a parent can open a custodial Roth IRA account and contribute up to 100 percent of the child’s earned income to a maximum of $6,000 per year. For example, if your 16-year old daughter earned $2,000 from her summer job, she can contribute up to $2,000 to the Roth IRA. The contribution is made after-tax and can be withdrawn at any time. The earnings can be withdrawn tax-free when your child reaches the age of 59 ½. 

Roth IRAs tend to work best when you are currently in a low tax bracket and have a long investment timeframe. Continuing the earlier example: If your daughter makes a $2,000 contribution and invests in an equity portfolio that went on to earn an average 8 percent annual return, her initial investment would grow to about $72,000 income tax free by her 61st birthday. Not a bad start!

It is important to note that the minor child needs to have earned income of their own to make a Roth IRA contribution. Income can include wages from a job or even self-employment income, such as baby-sitting or lawn mowing. IRS Publication 590-A lists the type of income the IRS counts as earned income for purposes of making a Roth IRA contribution. 

While the child must have earned income, the Roth IRA does not need to be fully funded by the child. As long as the Roth IRA contribution does not exceed the amount of the child’s earned income, how the funding occurs is your decision. Some parents encourage their kids to invest their own money and then offer to match their contribution. Other parents consider making this part of their estate planning and will fund the contribution entirely. Either way, it is a fantastic opportunity to start the conversation about retirement saving and the value of money with your kids.

If you are interested in this opportunity, feel welcome to reach out to one of our financial planners.


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