Can I Open an IRA for My Child?

Mom and child putting coins into glass jars

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If you're wondering if you can open an IRA for your child, the short answer is yes you can, but only if your child is earning income. Anyone earning income who is younger than 70 1/2 can make contributions to a qualified retirement account, but since you have to get them to contribute some of their own earnings, the toughest part will 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.

If you can convince your child to make contributions to an IRA or, even better a Roth IRA, you can even match those contributions up to the contribution maximum for the year. The maximum limit for both accounts is $5,500 for the 2018 tax year. Keep in mind that you have until the April 15, 2019 tax filing deadline to make an IRA contribution for 2018.

Why is a Roth IRA better?

For kids, in particular, a Roth is a great idea because you pay today's taxes on future investment growth. Roth IRA contributions are made after-tax, and you pay no taxes on distributions from a Roth at retirement. Your child will not likely ever be in a lower tax rate than they are today, so it's a great time to make the most of Roth's benefits. Contributions to a Roth can be withdrawn tax and penalty-free before retirement. So your child has early access to some of their savings, just be aware of special Roth withdrawal rules.

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. Earnings potential rises exponentially the earlier you start as an investor in a tax-deferred account.

If you want to teach your child about the financial markets, getting them to invest their own cash is a good way to start. For example, you can show them how your money can buy you a few shares of a single stock or give you access to the entire market with a mutual fund or exchange-traded fund. Companies like Fidelity, Vanguard and T. Rowe Price can help you get started with accounts that have low annual fees as well as low minimums to start investing. At T. Rowe Price you can start an IRA with just $1,000, compared to $2,500 at Fidelity and $3,000 at Vanguard. At Fidelity, you can get into a Roth IRA or traditional IRA if you sign on to make regular contributions of $200 a month. 

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. 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. Parents should be using their IRAs or Roth IRAs to save for their own retirement, not for college.