Can You Open a Roth IRA With Your Child?

Roth IRAs can offer some tax advantages to savers, including the benefit of tax-free qualified distributions. You may be wondering if it’s possible to open this special version of an individual retirement account (IRA) jointly with your child or teen. The answer is no; however, you can open a Roth IRA on behalf of your child to give them a head start on saving.

How a Roth IRA Works

A Roth IRA is a type of retirement account that allows for tax-advantaged savings. These accounts are governed by Internal Revenue Service (IRS) rules that dictate who can contribute, how much they can contribute, and how distributions are taxed.

Here are the defining characteristics of a Roth IRA:

• Contributions are not tax deductible.
• Qualified withdrawals are tax-free.
• Original contributions can be withdrawn without a tax penalty.
• There are no required minimum distributions (RMDs).

Roth IRAs have annual contribution limits. For 2022, the limit is $6,000, with an additional $1,000 catch-up contribution allowed for savers age 50 or older. For 2023, the limit is $6,500 with an additional $1,000 catch-up contribution. Whether you can contribute to an IRA depends on your filing status and modified adjusted gross income (MAGI).

Source: Internal Revenue Service

Opening a Roth IRA for a Child

It’s possible to open a Roth IRA on behalf of a child only if that child has earned income.You would need to set up a custodial account, which you can do through a brokerage. Custodial accounts—which also can be used to save for education expenses for kids—are controlled and managed by an adult for a minor child. Once the child reaches adulthood, the assets in the account become theirs.

Opening a custodial IRA for a minor child isn’t that different from opening an IRA for yourself. The main steps include:

• Choosing a brokerage
• Completing the application for a custodial IRA
• Linking an external bank account for funding

You’ll need to share your personal details, including your name, date of birth, and Social Security number. The brokerage will need the same information for your child.

A custodial Roth IRA for a minor child follows the same rules for contributions as a noncustodial IRA. The maximum contribution allowed must be the lesser of $6,000 for 2022 ($6,500 for 2023) or their total earned income for the year.

For an adult, the lesser-amount restriction rarely comes into play. For a kid, of course, it often does. For example, if your child earns $3,000 in one year from mowing lawns or babysitting, then the most that they could contribute to a custodial Roth IRA is $3,000. You can’t put in another $3,000 of your own money to reach the $6,000 limit.

However, the IRS won’t know where the cash actually came from. Theoretically, if your child has earned $3,000, you could contribute $3,000 on their behalf—or match what they contribute, up to $3,000. This is a good way to introduce the concept of matching funds—which your child will, you hope, encounter later in the workplace with an employee 401(k).

Benefits of Opening an IRA for a Child

There are some good reasons to consider opening an IRA for a child if they’re already earning money. One of the most obvious advantages is that time is on their side when it comes to saving. The more time their money has to grow, the more they can capitalize on the benefits of compounding interest. As they’re adding money to a Roth IRA instead of a traditional IRA, kids also get the benefit of tax-free distributions later when they’re ready to use that money for retirement.

Roth IRAs offer flexibility, as original contributions can be withdrawn without triggering a tax penalty. Funds withdrawn from original contributions can be used for any purpose. For example, your teen might take $4,000 from their Roth IRA to buy a used car. Once the account has been open for five years, your child can take out up to $10,000—without penalty and tax free—toward the purchase of a first home.

Opening a Roth IRA can also be a good way to introduce kids to the difference between saving and investing, and to instruct them on how the stock market functions. You can sit down with kids to review their investment options and explain how stocks, mutual funds, and bonds work. This can also be a good opportunity to illustrate the power of investing versus saving in terms of the potential returns earned over time.

The Bottom Line

Opening a Roth IRA for a minor child or teen can be a good way to introduce them to basic financial concepts, such as saving and investing. A parent oversees the account and helps guide them with their investment decision-making until they’re old enough to manage their IRA on their own. When opening a custodial IRA for a child, it’s important to compare options at different brokerages. Specifically, you should pay attention to the range of investment options, fees, and ease of use of the brokerage’s online platform or mobile app.