Roth IRA for Kids

Kate Hennessy CFP® |

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 caddying, too. This year the most a child can contribute annually is $7000, 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 so some adults will match whatever contributions the child makes. 

Roth IRAs have the added benefit of the potential to withdraw some funds along the way if needed, subject to limitations. 

So, how much money are we talking about?

Let’s walk through an example. Let’s use Annie, a 15-year-old teenager who caddies in town. 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!