Roth IRA for Kids

Kate Hennessy |


When I was a teenager I had a summer job and my parents helped me open a savings account.  This action started me on my savings path and while I wouldn’t say I was saving for retirement at that point in my life, I did start to understand the concept of saving.

Today there are many opportunities to help a child invest for their future, and to teach a child about the importance of saving. While savings accounts still exist, there are now tax efficient ways, such as a Roth IRA, to teach a child to save for his or her future.

Here’s how a Roth IRA works – an adult sets up the Roth for the benefit of a child. Once the child reaches a majority age (18 or 21 depending on your state), the adult then transfers the account into the child’s name. Children under the age of 18 are eligible to contribute to a Roth IRA. 

Children must have employment compensation (earned income) in order to be eligible to fund their Roth IRA. Earned income doesn’t have to be W2 income, it can come from babysitting, mowing lawns, or shoveling snow. The most a child can contribute annually is $6000, however the annual IRA contribution can’t exceed a child’s earnings for the year.

It might be a challenge to ask your children to save 100% of their earnings (how many adults would do that!), so some adults will match whatever contributions the child makes. For example, if the child earns $3000 in a year and can save $1000, the adults would match the $1000. This lets the child save $2000 and still keep them under their earned income and the IRA’s $6000 limit. A child’s income must be tracked and reported on a tax return and the income will be subject to a self-employment tax.

The beautiful thing is that once a child reaches his or her majority age, they control the account and can continue to invest in the Roth IRA every year until they reach the income limitation. They are on their way to saving for retirement!

Roth IRAs have the added benefit of the potential to withdraw some funds along the way if needed, subject to limitations. This means that the original amount contributed in the Roth IRA, but not the earnings, could be available to use as a down payment for a home for example.

So, how much money are we talking about? 

As a parent, I spend a decent amount of money paying babysitters, especially during the summer months. Let’s use Annie, a 15 year-old teenager that babysits in town as an example. If she starts to save $2000 per year at age 15, she will accumulate over $800,000 by the time she is age 65, assuming a 7% return. If she had waited until age 25 to start, she would have accumulated only $400,000. Starting at age 15 instead of age 25 doubled her retirement savings in the Roth IRA!