If your child already has a savings account, you might be interested in exploring additional opportunities to help them build wealth over time. A custodial Roth IRA, managed by an adult, can be particularly appealing. It allows you and your child you to invest in a variety of assets, such as growth stocks and exchange-traded funds, which can potentially increase the value of your child's portfolio's. Over time, your child could build up a sizable nest egg, which would be completely tax-free after they reach 59 1/2.
Also, the Roth IRA could be useful even before your child reaches retirement, for instance by helping to pay for college expenses. While the benefits of a Roth IRA are compelling, there are two important questions you should consider before proceeding.
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1. Does your child have eligible earned income?
It's true that anyone, including a newborn with a Social Security number, may be eligible to contribute to a Roth IRA, as long as they meet all the necessary requirements. The main hurdle to consider for your child is the earned income requirement.
In a nutshell, earned income is when your child performs a service or task and receives money from a job or self-employment. Allowance, interest, dividends, and other forms of unearned income do not count. W-2 earned income, where the employer typically withholds income tax from the paycheck, is the easiest form of income to track. If your child has done any of these jobs, they may have had W-2 income:
- Assisting visitors at amusement parks during the summer
- Bagging groceries at a store
- Helping at a clothing shop
- Leading groups as a camp counselor
- Managing orders at a fast food drive-through
- Working in an office setting as an intern
- Serving customers as a cashier
- Stocking shelves at a grocery store
- Supporting activities at a recreational center
Self-employment income can also make your child eligible for Roth IRA contributions, but you'll need to carefully track and document it to ensure it qualifies. This type of income can include:
- Acting
- Babysitting
- Dog walking
- Lawn mowing
- Modeling
- Tutoring
A child may also work in a parent's business, and those earnings can qualify for a Roth IRA contribution, as long as the work is considered legitimate and age-appropriate. For example, paying your 9-year-old child $3,000 for a day of work on a business photo shoot may be reasonable, but paying them $1,000 for a day of cleaning the office is likely excessive.
2. How much can you contribute to a Roth IRA for your child?
After you've checked the box on the earned income requirement, you'll need to figure out how much you and your child can contribute to a Roth IRA every year. For the 2024 tax year, you and your child can contribute a maximum of $7,000 to their Roth IRA, as long as their modified adjusted gross income is under $146,000. Single filers can still contribute a reduced amount until their income exceeds $161,000. This six-figure income threshold is unlikely to be an issue for your child if they are working typical jobs for their age.
However, you won't be able to contribute the full $7,000 if your child's earnings for the year don't cover that amount. For example, if your child earns $4,000 from tutoring and shoveling snow in 2024, the maximum contribution to their Roth IRA would be $4,000. If you plan to match your child's contributions to encourage saving, they could contribute $2,000, and you could contribute the remaining $2,000.
Before you open a Roth IRA for your child, it's important to understand the IRS reporting requirements. If you're unsure about the supporting documentation needed, how tax filings work, or how to track self-employment activity to prove your child's income, consult with a Certified Public Accountant or another knowledgeable professional who can guide you. The more you understand how it all works, the better prepared you'll be to set your child on the path toward a million-dollar retirement.
