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Year-End Giving: Roth IRAs for Children

Still not sure what to get your children or grandchildren this holiday season? Maybe they have too many toys or enough clothes to fill two closets. How about the gift of financial success and freedom – did that make it on their wishlist this year? It may sound boring to them now and they can’t possibly fathom the true gift that is time and compounding, but as you’ve probably learned over the years it’s worth the wait.

According to the IRS you are allowed to give up to $16,000 as a gift to anyone of your choosing, without triggering the Gift Tax in 2022. This limit will increase to $17,000 per person in 2023. The good news about this limit is that it is well above the limit one can contribute to a Roth IRA ($6,000 in 2022) and usually more than a minor earns in a year. So why not give them the gift of tax-free future income in retirement?

Most children, whether they are teenagers or younger, don’t spend a lot of time worrying about retirement. After all, when you’re juggling schoolwork, extracurricular activities, and all the other challenges of adolescence, saving for retirement may not even register on your radar screen.

However, that doesn’t mean that savvy parents, grandparents, and other family members can’t step in to help jumpstart their children’s retirement savings. One way to do that is to establish a custodial account Roth IRA for Minors.

What is a Roth IRA for Minors?

A Roth IRA for Minors provides all the benefits of a regular Roth IRA, but is geared toward children under the age of 18. Minors cannot generally open brokerage accounts in their own name until they are 18, so a Roth IRA for Minors requires an adult to serve as custodian.

The custodian maintains control of the child’s Roth IRA, including decisions about contributions, investments, and distributions. In addition, statements are sent to the custodian. However, the minor remains the beneficial account owner and the funds in the account must be used for the benefit of the minor. When the minor reaches a certain required age, typically either 18 or 21 in most states, the assets must be transferred to a new account in their name.

Who is eligible?

You might be wondering when you can open a Roth IRA for Minors or who qualifies. The child must meet these following two criteria to have a Roth IRA for Minor established:

  • Is the child under 18? If yes, then they are eligible for a Roth IRA for kids! This means an adult can open an account on their behalf.

  • Does the child have earned income? If yes, then they are eligible to start contributing to their account. This can be income from any kind of age – appropriate job (whether self-employed or through an employer) such as a summer job, babysitting, mowing lawns, or even a lemonade stand. This is where you come in – you can also start gifting your child contributions into their Roth IRA as long as it does not exceed their earned income for the year. For example, let’s say they make $1,000 this year from babysitting – you can deposit $1,000 into a Roth IRA for them.

Why start a Roth IRA for kids?

If you’re a parent, retirement may seem like a far off distant dream for yourself, so why should your children start a Roth IRA right now? As mentioned earlier, the benefits of time and compounding are certainly one reason. Another is the tax structure of the Roth IRA. Generally children are in the lowest tax bracket, so while they could contribute to a traditional IRA, using their after-tax income now for contributions will save them exponentially in 60+ years when they will hopefully have significantly more income.

A few other benefits for your child to have a Roth IRA:

  • Roth IRA contributions (but not investment earnings) can be withdrawn at any time, without penalty. So a Roth IRA can be a great emergency fund for your kids, in addition to a great retirement savings vehicle.
  • IRA funds can be used for college expenses penalty-free. So a Roth IRA can help your kids (or even their kids) pay for college.

  • Up to $10,000 in investment earnings from a Roth IRA can be withdrawn tax- and penalty-free for a first-time home purchase. This is in addition to the ability to withdraw any contributions.

This year instead of more Legos someone will ultimately step on or video games that will be forgotten in a year, try a new kind of gift. Not only can it spark a foundational conversation about one’s future, it is also a great way to start good saving and investing habits early — and give that money the potential to grow for many years.

M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. As a fee-only firm, we do not receive commissions nor sell any insurance products. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. 

This blog has been provided solely for informational purposes and does not represent investment advice or provide an opinion regarding fairness of any transaction. It does not constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.

As Director of Client Communications, Alyssa engages with all of the firm’s clients to better their experience and make a positive impact on their lives. As an Associate Wealth Advisor and member of the Investment Committee she specializes in working with women, mid-career professionals and families. As an advisor that embodies all these characteristics herself, she is able to easily connect with her clients and their lives.