Roth IRAs are one of the most useful tax-advantaged investment tools available to most Americans. While most people start investing sometime after their first full-time jobs, the younger generations are eager to get in on the game. But can children and teenagers open their own Roth IRAs? Yes, but they may need a parent or guardian’s help.

Key Takeaways

  • There are no age limits to open a Roth IRA. As long as you earn income, you can open an account.
  • As a minor, parents will have to open a custodial account in the child’s name and control the investments until they come of age.
  • Children pay low to no taxes, so contributing after tax dollars at this point in their lives allows them to reap the maximum benefits.

No Age Limits

One of the best parts of a Roth IRA, other than the ability to shield you from higher tax rates later in life, is that there are no age limits to open an account. As long as the account holder has earned income for the year, they can contribute to a Roth IRA.

While they may be able to earn income, they can’t sign up for a Roth IRA on their own until the age of 18. Before then, you can open what is known as a custodial Roth IRA.

A custodial Roth IRA allows minors to contribute up to the maximum contribution limit for the year or 100% of their earnings, whichever is less. For the 2021 and 2022 tax year, they could contribute up to $6,000.

To open a custodial Roth IRA, you may have to search a bit. Not all banks or brokerage firms offer custodial accounts. Once you choose a platform for your child’s account, you will need their social security number to sign up. After that, you’ll just need to track their wages to determine how much they can contribute each year.

The limit for a custodial Roth IRA is $6,000 or 100% of their income, whichever is less.

What Is Earned Income?

While many teenagers hold part-time jobs during the summer or after school, this isn’t the only income that counts. Wages, salaries, bonuses, and self-employment income are all considered earned income.

For many children, self-employment income can be their entrance into the world of Roth IRAs. For example, if James has a budding TikTok following or YouTube channel, they could use that income for a Roth IRA, so long as they are earning less than the yearly income restriction ($140,000 for 2021 and $144,000 for 2022).

On a smaller scale, babysitting, mowing lawns, or other entrepreneurial endeavors would count as earned income. If your family has a business, you may employ your child and pay them a fair market wage, which can then be invested.

What doesn’t count, unfortunately, is allowance or money for chores. Ideally, the IRS wants all earned income to be trackable, either by a 1099 or W-2 or with receipts of work provided, such as in the case of babysitting.

Benefits of a Roth IRA for Minors

If your child falls within the earned income category, then they stand to benefit from a Roth IRA. Since children typically fall within a very low tax bracket, they would invest their after-tax dollars at a low rate in their Roth IRA. Given this fact, they are almost inevitably going to be in a higher tax bracket when they choose to withdraw money, whether they use the funds for a downpayment on a house or wait until retirement age.

The ability to withdraw contributions at any time is also a benefit. This flexibility means they can use contributed funds from childhood to fund their education or dreams of home ownership.

Can I Contribute to My Child’s Roth IRA?

Yes. Parents or family friends and relatives can contribute to a custodial Roth IRA as long as their contributions don’t exceed the amount of that the child earned in a year. Parents can contribute all or part of the available earned income amount. For example, if your child earned $3,000 by babysitting, you or other family members can make contributions up to that amount.

Who Controls the Investments Within a Custodial Roth IRA?

As the person who opened the account, you ultimately control what investments are made until the child is age 18 or 21, depending on the state in which you reside.

What Happens to the Custodial Account When They Come of Age?

Once the child reaches that age of 18 or 21, depending on the state, the custodial Roth IRA will transfer to the child and function as a normal Roth IRA. The child will then have the ability to contribute and withdraw as they see fit.

The Bottom Line

The beauty of a Roth IRA is its flexibility, starting with the lack of an age threshold. If your child is a budding entrepreneur, child actor, or just a hardworking teen, they can reap the benefits of this tax-advantaged plan. More than any other user, children stand to benefit from contributions at the lowest possible tax bracket. Plus, introducing them early to the practice of saving and learning about investments can create lifelong habits that will serve them well.

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