Can I Open an IRA for My Child?
It is possible to open an individual retirement account (IRA) for a child. However, there's one caveat: A child must be earning their own income in order to open an IRA. That income can include money earned from self-employment work (babysitting, shoveling snow, walking dogs, mowing lawns, etc.) or formal employment.
When it comes to formal employment, children must be at least 16 years old to start working legally, unless they're working for a business solely owned by their parents or guardians (with some exemptions).
Opening an IRA for a Child
If you want to open an IRA account for a minor, it must be a custodial account, meaning it's held by the parent or guardian in the name of a minor. That parent or guardian maintains control of the account until the child is of legal age, which varies by state. The account must be transferred as soon as the child reaches the age required by your state.
There's usually no minimum to open a child's IRA or Roth IRA account.
Not all banks offer custodial IRAs, but two that do are Fidelity and Charles Schwab.
To open a custodial account for your child, you'll usually need to provide the following:
- Your identifying information (date of birth, social security number, etc.)
- The child's identifying information
- Your contact information (mailing address email address, phone number)
- Your employment information
Contributing to a Child's IRA
Contribution maximums for childrens' retirement accounts are the same as those for adults. The IRA contribution limit for 2020 is $6,000. However, there is an additional exception: Contributions also can't be more than a child earns for the year. So if they earn $2,000 for babysitting and walking dogs during the year, then their IRA contribution can't be more than $2,000.
Since you have to get them to contribute some of their own earnings, the toughest part of opening a child's IRA account could be convincing them to stash away today's money for their golden years.
As an alternative, you may also choose to make a contribution to your child's account based on their earned income. You can also choose to match your child's contribution, as long as the total doesn't exceed the amount they earn or the contribution maximum for the year—whichever is lower.
Roth IRAs for Children
For kids, in particular, a Roth can be beneficial because they're paying today's taxes on future investment growth.
Roth IRA contributions are made after taxes, meaning that account holders can take advantage of years of tax-deferred compounding. In addition, you pay no additional taxes on qualified distributions from a Roth at retirement.
If needed, account owners can also make qualified early withdrawals from a Roth IRA. However, if they choose to go this route, they should be aware of the special Roth withdrawal rules to ensure they don't get penalized.
Why Open an IRA for Your Child
IRAs for kids are not a widely understood concept, but they can be a great strategy to encourage investing in a tax-advantaged account at a young age. Contributions can add up quickly, and earnings potential rises exponentially the earlier you start as an investor in a tax-deferred account.
Plus, with an early IRA or Roth IRA you are setting your kids up with a financial life that they can build upon and learn from a few years earlier than their peers. Early experience like that can be invaluable in helping your child make wise financial decisions.
IRAs and College
All IRA and Roth IRA contributions can be withdrawn tax and penalty-free to pay for education. However, there is a downside to using a retirement account to save for college.
Having an IRA or Roth IRA in your child's name may affect his or her chances for financial aid. Children's assets in a retirement account are considered when determining need, whereas those same assets wouldn't be considered if held in one of the parents' accounts, since parents should be using their IRAs or Roth IRAs to save for their own retirement, not for college.
Fidelity. "Turbocharge Your Child's Retirement With a Roth IRA for Kids." Accessed March 8, 2020.
United States Department of Labor. "Elaws—FLSA—Child Labor Rules Advisor." Accessed March 8, 2020.
Fidelity. "Fidelity Roth IRA for Kids." Accessed March 8, 2020.
Charles Schwab. Schwab MoneyWise. Accessed March 8, 2020.
Fidelity. "Open A Custodial Account." Accessed March 8, 2020.
Internal Revenue Service. "Retirement Topics—IRA Contribution Limits." Accessed March 8, 2020.
Fidelity. "Thinking About Using Your Retirement Savings to Pay for College?" Accessed March 8, 2020.