How to Open a Roth IRA for My Child? Here's How!

investing tax tips taxes

Want to Open a ROTH IRA for Your Kids?

Opening a Roth IRA for them might just be the unfair advantage you need! In this blog post, I'll walk you through the savvy process of setting up a Roth IRA for your child.

YES, it's possible, and YES, I'll tell you exactly how to get it done!

But before we begin, in case you didn't know, I’m a CPA. My client emails me and asks about how to open a Roth IRA for her kid. I figured this would be a good topic since others might have the same question.

So, how do you do this?

I haven’t done this personally, but it’s a great idea. Setting up a Roth IRA for a child is a great way to give them a financial head start in life.

Here’s the fact pattern:

The daughter, Lucy, helped her grandparents with babysitting and tech support for the year. For these services rendered, her grandparents paid her $2,000 via personal checks. Her parents want to use this money to open a Roth IRA for Lucy. 

The parents want to know, if there’s anything else they should be aware of for Lucy’s income or for opening her Roth IRA.

They say they will report this as income for her on her tax return. But, Lucy won't have any official tax documents like a 1099. 

What do they need to know to properly do this?

I’ll break this down into 3 easy steps:

Okay, so a Roth IRA is a great tax-deferred investment vehicle. You’re basically putting in money that’s already been taxed, but you get to take it out when you reach age 59 and a half, and it’s all tax-free.

Step 1. The first thing you need, to be able to do this is, the minor child needs to have “earned income”. This is money they earn for doing things like working, selling things, maybe modelling… things like that. 

Step 2. Also, the child would then likely need to file his or her own personal tax return.

You’ll be able to invest up to the child’s “earned income” or the annual contribution limit of $6,500 in 2023, whichever is less.

Step 3. Next, you would open up what’s called a Roth IRA custodial account for your child. You can do this with companies like Vanguard, Fidelity, Etrade, etc.

These fund companies would generate a form 5498, which reports your total annual contributions to an IRA account and identifies the type of retirement account you have. This form would be needed at tax time for your child.

Once you’ve opened an account with a broker, you need to fund it and invest the contributions. 

Opening a Roth IRA for your child can be a great way to teach them about saving and investing at an early age. 

Let me know if you have any questions about the process of opening a Roth IRA for your child. And if you’ve done this for your child, let us know how it’s going in the YouTube video comment section.

Just so you know, this is a high-level overview. And if you want specific advice tailored to your situation, it's advisable to speak with an investment -- I'm sorry, not an investment, but a tax advisor. For investing the funds, then it's a good idea to speak with an investment advisor.

What are some other rules you might need to be aware of?

  • There's no minimum age limit to contribute to a Roth IRA for kids.
  • The contribution limit is 100% of the child's earned income or the IRA contribution limit, whichever is less.

  • Gift income does not count towards earned income.
  • Contributions you make are not tax deductible.
  • The account growth and qualified distributions are not taxed.
  • Contributions can be withdrawn without penalty at any time.

By the way, I’ve got an excellent tax deductions cheat sheet that you can download for FREE here. It’ll help you ensure that you’re not missing out on any valuable tax deductions. 

Thanks for reading and see you in the next blog post!

About The Author

Noel Lorenzana is an Illinois-licensed, Registered Certified Public Accountant with over 20 plus years of experience.

Through his online educational content, YouTube videos, easy-to-understand courses and 1-on-1 consulting, he gives you the tools to become tax savvy for yourself. 

Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.