In this clip from "Financial Planning Q&A 60" on Motley Fool Live, recorded on Jan. 26, Motley Fool contributor Dan Caplinger discusses some of the limitations and conditions in setting up a Roth IRA for your child and shares when it might be best to consult a professional.
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Dan Caplinger: Technically, there is no limit to an age for a Roth IRA. What, in practical terms, limits Roth IRA contributions is that the person for whom the Roth IRA is opened, in this case, the 3-year-old and the 5-year-old, needs to have earned income. Earned income meaning income from a job, from self-employment, and it's pretty rare. There are stories about, if you're lucky enough to get like a child acting gig, if you're a child model. You've seen kids on TV shows, and movies, and commercials. Somebody's kids are getting paid for those, and that would be earned income. For the most part though, earned income for kids usually starts out being babysitting, or paper delivery, or bagging groceries or working at a fast food place or something like that. That's not happening at five or three. The extent to which you can create paid work for your kids is, I won't say controversial, but it's something you're going to need to talk to your accountant about and come up with a comfort level about what you're comfortable with. If it's legitimate work for which a legitimate and fair wage is paid, then I think you can make a case that it's earned income to justify a Roth IRA. If you pay your kid $50,000 a year to spend 10 minutes a week picking up their room, then I wouldn't want to be the tax lawyer defending you if the IRS decided to pick up on that one. That said, people have differing levels of aggressive positions with their taxes with the IRS. I'm not going to tell you to do it or not to do it. I am going to suggest you might want to get some professional help to justify it if you decide to take an aggressive position.