Roth IRA for Kids: 6 Things to Know

piggy bank with dollars

Piggy bank with dollars | iStock/Getty Images

Most financial experts encourage saving for retirement as early as possible. One thing you might not know is retirement savings is possible even for kids. That’s right; you can save money in a Roth IRA for your child by opening a custodial account. Here’s what you should know.

1. Any adult can open an account for a child

If you want to open a Roth IRA for a child but you’re not related to him or her, don’t worry. You don’t have to be a parent to open a Roth IRA for a youngster. Any adult can open and manage this account for a child. You can be a parent, aunt, uncle, grandparent, or a family friend. A Roth IRA allows you to make after-tax contributions. This money can later be withdrawn without tax implications.

2. Contribution limits are the same

There are limits to how much you can contribute to a Roth IRA. These limits are the same for both child and adult accounts. For 2018, combined contributions to traditional and Roth IRAs can’t be more than $5,500 per year. (Those age 50 or older can save up to $6,500). If you go over the limit, you can expect to incur a penalty. Each year, you’ll be required to pay a 6% tax on the excess contributions.

3. Age doesn’t matter

A child of any age can contribute to a Roth IRA account if he or she has earned income. The IRS defines earned income as all the taxable income and wages received from working either for someone who pays you or from owning a business. Jobs such as dog walking or babysitting would qualify, for example.

4. Contributions can be used for expenses other than retirement

If cash is needed for expenses unrelated to retirement, this isn’t a problem. Once contributions have been made to the Roth IRA account for five years, up to $10,000 can be used to purchase a first home, without taxes or penalties. Roth IRA earnings can also be used for certain qualified education expenses, such as college tuition. Know, however, that distributed earnings will be taxed as income.

5. You can withdraw contributions at any time

Since Roth IRAs are funded with after-tax money, contributions can be withdrawn at any time without penalty. Prematurely withdrawing earnings, however, do come with penalties in some cases. If you want to avoid penalties, the withdrawal must be a qualified distribution. For a withdrawal of earnings to be considered a qualified distribution, the account must have been held for at least five years. In addition, the account holder must be at least 59½, disabled, deceased (heirs receive the distribution) or putting up to $10,000 toward the purchase of a first home.

6. Several firms offer IRA accounts for kids

When you’re ready to open an account for the child in your life, you have plenty of options. You can open either a Roth IRA or traditional IRA through several firms. A few that open accounts for minors include Fidelity, Charles Schwab, T. Rowe Price, and Vanguard.

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