Establishing a Roth IRA for your children, grandchildren, or even adult child is an excellent opportunity
to build tax-free wealth for the next generation. A main benefit of a Roth IRA is the tax-free growth, and
children have extra years for those tax-free earnings to accumulate. Here are 5 key facts about Roth IRAs
- While minors are unable to open an account of their own, most IRA providers allow parents to
serve as a guardian on a Roth IRA for their child while the child is a minor. At the age of
majority, typically 18, the child takes over.
- The child must have reportable earned income to contribute to the account. This does not
mean they have to use their own earned income to make the contribution; parents or
grandparents can make the contribution for the child. If you own a business, consider hiring
your children to create the earned income needed to fund the Roth IRA. Just remember you
must pay them a reasonable compensation.
- The Roth IRA annual contribution limit is $6,000 in 2021 or the child’s total earned income for
the year, whichever is less.
- Contributions (basis) can be distributed tax and penalty-free at any time for any reason.
Earnings may be subject to tax and a 10% early withdrawal penalty if made before age 59 ½, but
there are some exceptions. The 10% early withdrawal penalty is waived if earnings are used to
pay for higher education. And if you are an eligible first-time homebuyer, you can withdraw up
to $10,000 without the 10% early withdrawal penalty.
- The Roth IRA provides an excellent opportunity to discuss the importance of saving and
investing in the future with children. It is important to have these discussions with the child to
make sure he or she is equipped to wisely manage the Roth IRA as an adult.