The Minor Roth IRA: Giving Your Kids a Retirement Head Start

You know how important it is to start saving for retirement as early as possible. However, it’s probably the last thing on the minds of your teenage children and grandchildren. But with the long-term viability of Social Security in flux and traditional pension plans going the way of the dinosaurs, young people will need to rely more on their own savings to fund their retirement lifestyle.

Most people don’t start saving for retirement until they join their employer’s 401(k) plan. But with more millennials going for post-graduate degrees, they may not get their first full-time job until they’re in their mid-to-late 20s.

Fortunately, there’s an option available right now to encourage kids to start saving now: The minor-owned Roth IRA.

Roth IRAs are funded with after-tax contributions. Earnings grow tax-free and can be withdrawn totally tax-free when your child turns age 59½ or older if they’ve held the account for at least five years. And unlike 401(k) plans and Traditional IRAs, your kids don’t have to start taking distributions at age 70½. In fact, they don’t have to take distributions at all.

Earned income is key

A minor-owned Roth IRA can be established at any age. However, your child must earn some of their own income before contributions can be made. W-2 income from part-time jobs almost always meets this requirement. Money they make from doing odd jobs around their neighborhood may qualify as long as what they’re paid seems reasonable and the payments are documented (i.e., your child issues invoices and keeps records of payments received). Money you pay them to do chores around the house may or may not be eligible.

Once their income eligibility requirements are met, your child can contribute up to the lesser of $6,000 or 100% of their earned income each year. The total amount can be comprised of their own contributions and gift contributions from you and other family members. But you’ll want to be careful not to exceed IRS gift tax limits.

Since these income and contribution issues can be complex, you want to speak to your accountant of tax preparer to make sure your actions won’t put you or your child at risk of IRS penalties.

Establishing a minor-owned IRA

Minor-owned Roth IRAs are generally established as custodial IRA accounts. Your child is the account holder and you or another authorized adult are the designated custodian. This gives you the authority to manage the investments (or allow your investment adviser to manage them) and act on your child’s behalf.

Once your child reaches your state’s legal adult age (usually 18 or 21), you can transfer the funds in the custodial IRA to a new Roth IRA they establish in their own name. From there, they’ll be responsible for managing their account (and making sure they meet the annual income eligibility requirements). 

Engaging your newly minted retirement saver

Your teenager may not share your enthusiasm for their new Roth IRA, so it’s up to you to engage them. Encourage them to contribute some of their own earnings, and offer to match them. Give them online access to their account so they can see how much their account is worth at any time. Go over the holdings in their portfolio to teach them the fundamentals of investing (or invite your financial advisor to speak to both of you about them). The higher their level of involvement, the more likely they’ll be to make saving for retirement an important financial priority.



This article was authored by Joelle Spear and Jeffrey Briskin. Joelle Spear is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or [email protected]. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.


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