Did you know a key part of your retirement strategy can also be a tool to help jump-start your kids’ financial future? We’re talking about Roth IRAs. If your child has earned income—from a summer job, for example—they’re eligible to contribute to a Roth IRA. This can create multiple opportunities for both you and your child.

The rules around Roth contributions

The IRS limits who can make Roth contributions on the upper end—if you earn too much money, you may be ineligible to contribute directly to a Roth account. The IRS also caps how much you can contribute in a given year.

Beyond that—anyone with legitimate earned income can open and contribute to a Roth IRA.

For instance, a child actor or model could contribute to a Roth IRA at 2, 4, or 6 years old. The child would be subject to contribution limits OR the total amount of their earned income—whichever is lesser.

What this means for your child

If your child gets a summer job, that may qualify them to open a Roth IRA. The job would need to come with taxable income.  Mowing neighbors’ lawns for cash likely wouldn’t count but interning at your landscaping firm might.

Your child would pay tax on the income, teaching them the importance of tax strategy early on. The good news, however, is that if your child is simply working a summer job, they’re likely in a very low tax bracket or even more likely, will owe no federal income tax, since the standard deduction covers it. 

Encouraging your child to invest in a Roth IRA also teaches them the value of saving and budgeting, versus spending every cent of their paycheck.

Once the funds are in the IRA, you can talk to your child about investing, risk, volatility, and asset allocation. From there, you can explain the value of compounding. Plus, any potential investment gains grow tax free and can be withdrawn tax-free later in life once your child reaches 59½ with a few notable exceptions.

The rules around Roth withdrawals

Generally speaking, you can access principal contributions to a Roth without facing early withdrawal penalties. This could help provide a potential buffer to your child later in life.

Beyond that, your child may be able to withdraw earnings from a Roth IRA without paying a penalty if they use the funds for qualified education expenses, the purchase of a first home, and a few other extenuating circumstances.

The logistics of a Roth IRA for minors

Legally, minors cannot open an investment account, so you (the parent or guardian) would need to open a custodial account in their names. This is something a financial advisor can help you with.

If you’re interested in exploring a Roth IRA for your child, let’s set up a time to discuss.