Traditional and Roth IRAs for Kids: It’s Never Too Early

It's never too early to teach your kids about finances and help them start saving for their own retirement.

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https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Kids: Open an IRA or Roth for their retirement
5 min read

Key Takeaways

  • Open an IRA for your child to help them get an early start toward retirement savings
  • Learn about contribution limits and other IRA rules as they pertain to minors
  • Because kids’ income often falls below taxable thresholds, consider a Roth IRA to keep the money tax-free through their retirement

We all want what’s best for our kids. It’s why we tell them to brush their teeth and sign them up for character-building extracurricular activities. When it comes to money, we might talk about the importance of saving up for purchases or even for college. But we often fall short when it comes to helping them understand wealth-building through investment.

“By the time your child has a summer or high school job, it’s important to have the conversation about saving for retirement,” says Dara Luber, senior manager, retirement at TD Ameritrade. “An IRA for your child can be a great tool to help them see the impact of saving and investing for retirement.”

Can I Open an IRA for My Child?

An IRA for your child can be a good way to help them start saving for retirement with their first job. You’ll need to open the IRA in your child’s name and manage the account as a custodian.

“The account is your child’s, and in their name,” Luber says. “When they reach the age of majority in your state, whether that’s 18 or 21, they take over the management of the IRA.”

If you already have an investment account, check to see if your broker offers an IRA for minors. Because the account is in your child’s name, you’ll need their tax identification number, usually their Social Security number. Keep your information, including your Social Security number, handy, just in case you need it.

There’s no age restriction on an IRA for minors. If you’ve got a five-year-old child actor, you could conceivably open an IRA for him or her and start putting money aside for their retirement.

Contributing to an IRA for Kids

Like any IRA, an IRA for minors comes with contribution caps. Currently, you can add $5,500 a year to an IRA. But you might not be able to put that much into an IRA for your child.

“Contributions are also limited by how much earned income your child has,” says Luber. “If your kid makes $3,000 as a lifeguard over the summer, and they don’t make any other money during the year, that’s the limit for them.”

Earned income, for the purposes of an IRA for your child, includes money from any job that they would report on a tax return. Self-employment, like mowing lawns and babysitting, counts as earned income, and your child can do necessary tasks for your family business, as long as you pay them a reasonable wage. 

You and your child can both make contributions, but your combined savings in the child’s IRA can’t exceed either their total earned income or $5,500, whichever is lower.

“A really great strategy is to introduce a match,” suggests Luber. “Tell your kid that if they put in money from their job, you’ll match it with your own money. This encourages them to take an interest in their future and how well the investments are doing.”

What About a Roth IRA for Kids?

A Roth IRA for minors can be another way to help your child build long-term wealth that grows tax-free. With a Roth, you contribute money after you pay your taxes. As a result, you don’t have to pay taxes when you withdraw the money decades later. But here’s the kicker: For many minors, such as those who hold part-time or summer-only jobs, their annual income falls below the taxable threshold. In such cases, a Roth IRA contribution could be essentially tax-free on the way in as well as on the way out. 

As you and your child contribute to the account, make sure to share and discuss the growth. Watching the account grow can help your child remain excited about the IRA, so they keep contributing once they’re on their own.

“Most kids won’t get a pension like their grandparents,” says Luber. “You need to start prepping them now for a successful retirement.”

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

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