Roth IRAs for Children: What You Need To Know

May 20th, 2014 at 10:43 AM

Roth IRAs can be established and owned by anyone who has earned income and that, of course, includes children. As many savvy investors know, Roth IRAs offer the best tax treatment for investment income in the tax code. I have many clients who establish these tax advantaged accounts for their children who have earned income; some open brokerage accounts and teach their kids to buy and sell stocks. Whatever your investment strategy, don’t leave your children out, and consider a Roth IRA as a valuable tool. Before you open a Roth IRA account , here’s what you need to know:

1. Earned Income–The only qualification to establishing a Roth IRA is that the account-owner has earned income. If your child works in your business, they can establish this type of account up to the amount of their earned income, not to exceed the annual Roth IRA limit of $5500. If a child has contributed to a Roth IRA, it is generally recommended that they either have a W-2 for the income or they file a Form 1040EZ for their self employment income, even if this is less than the standard deduction.
2. Custodial IRA–If you open a Roth IRA for your child, it is considered a custodial account because the account owner is not old enough to establish this account. Therefore, their parent or legal guardian must open the account and oversee it. When the child reaches the age of 18, then they can take over as the responsible party for the account.
3. Penalty Free Withdrawals–In all cases, the amounts contributed to a Roth IRA can be withdraw penalty free. Earnings withdrawn may be subject to a penalty unless there is a qualified exception. Both contributions and earnings may be withdrawn without a penalty for qualified higher education expenses of the child–to fund college education expenses, as one of the qualified exceptions.

There are other specific regulations associated with Roth IRAs.

Please contact me for further details.