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  • J. J. Wenrich CFP®

Roth IRAs for Kids: What do you need to know?

When it comes to investing, there may be no greater asset than “TIME”. Getting started early in life can make a BIG DIFFERENCE. (Check out this video "The Emoji Twins" to see the power of saving early.)

Many parents (and grandparents, etc.) look for ways to save and invest for their children’s future, and the Roth IRA is one of several account types from which to choose.

This post will highlight the Roth IRA, its benefits, its limitations compared to other options, and finally how it works if you want to open one for your child.

First things first

Before getting into the specifics of Roth IRAs for kids, allow me to set the stage first for those new to investing.

When getting started, you have two decisions to make:

1) What type of account?

2) What type of investment?

These are two separate decisions that get often lumped together out of a lack of understanding.

To clarify, the account type establishes various rules for taxation of the investment. The type of investment determines the rate of return you may earn.

The Roth IRA is the NOT the investment. The Roth IRA is the account type. You can put (almost) any investment inside the Roth IRA account.

For example, you could invest in a money market, or you could invest in the stock market inside a Roth IRA. Your rate of return is going to coincide with the performance of the investment, regardless of account type. The account type determines how you are taxed when/if you make money on the investment.

Think of the account type as the umbrella covering your investments that protects them from taxes. The umbrella isn’t the investment – it’s the tax shelter.

That said, certain rules apply to each.

Tax Details of Roth IRAs

When discussing tax sheltered accounts such as Roth IRAs, 529s and 401ks, it’s simplest to think about taxation in three parts.

  1. IN: What are tax consequences when money is deposited into the account?

  2. ANNUAL: How are year-to-year taxable events treated?

  3. OUT: What are tax consequences when you withdraw money?

1: IN: What are tax consequences when money is deposited into the account

There are NO tax consequences when money is deposited or “contributed” into a Roth IRA. There is NO tax deduction.

2: ANNUAL: How are year to year earnings treated?

You are not taxed on any interest, dividends, capital gains, or other earnings on your investments inside a Roth IRA.

If you make money on an investment through receipt of dividends or interest, or if you sell something for a gain, it is considered a taxable event unless you own the investment inside of a tax-sheltered account such as a Roth IRA.

3. OUT: What are tax consequences when you withdraw money?

With the Roth IRA, the answer depends on two factors:

  • How old is the account owner?

Withdrawals of ANY amount are TAX-FREE after age 59½ as long as an account has been established for at least 5 years.

  • Are you withdrawing contributions or earnings?

Withdrawals of contributions are tax-free at any age. For example, if you contribute $6,000 and it grows to $10,000, you can still withdraw your original $6,000 at any age with no tax or penalty.

Withdrawals of earnings are tax-free after age 59½, but subject to tax and 10% penalty if taken prior to age 59½ with some key exceptions. Withdrawals of earnings for qualified education expenses are penalty free but still subject to tax. (1 Other exceptions to the 10% penalty exist for first-time home purchases, medical expenses greater than 10% of income, for health insurance premiums while unemployed, and other things).

Tax-Free Withdrawals of Earnings in Retirement

The greatest benefit to the Roth IRA compared to investing in a taxable account is the ability to pay no taxes on withdrawals after what could potentially be several decades of growth. The amount of taxes saved upon withdrawal after 50-60 years of growth could be pretty staggering if your investments perform well.

Roth IRA’s also give you the added flexibility of being able to access contributions without penalty or tax prior to age 59½.

This flexibility can make Roth IRA’s an attractive option for parents and grandparents interested in helping children save for their future, but also wanting to give the option to efficiently withdraw some of the money for education or a down payment on a house at younger ages.

Keep in mind, withdrawing earnings in the account prior to age 59½ would be subject to both income tax and a 10% penalty (unless it qualified for an exception 1). If you anticipate the child wanting or needing to access the ALL of the money before age 59½, the Roth IRA may NOT be the most appropriate type of account.

Other Details

  • Accounts can be opened at most banks and/or brokerage firms.

  • Maximum contribution is $6,000 per year. Contributions can be made until Tax Day of the following year.

  • The account must be opened and managed by an adult until the child reaches the age of majority for the state where they live.

  • It should also be noted that the money belongs to the child once they reach the “age of majority” for their specific state (18 or 21 generally). They are free to do what they want with the money, including make bad decisions regarding taxes and penalties. Keep in mind, waiting to touch money until age 59½ can sound like waiting to age 100½ to an 18-year-old adult human.

  • Eligibility to contribute to a Roth IRA is subject to minimum and maximum income limits 2. The maximum is usually not a problem… The minimum income needs to be paid attention to…

  • Individuals must have earned income of at least their contribution amount, meaning if you want to contribute $6,000 to your child's Roth IRA, the child must have earned income of at least $6,000. Parents can still gift their children the money for the contribution, but the child needs to have at least the minimum level of income to be eligible for the contribution.

How do kids become income eligible?

By earning income.

If you child has a job already, they may already be eligible to contribute. Things like lemonade stands, lawn mowing, babysitting, sweeping chimneys and anything else they do to make money qualifies as earned income, but you may have to pay self-employment taxes on that income if it is over $400 per year. Most states have income tax as well to consider if you are reporting self-employment income.

This is important to think about when deciding if the Roth IRA is the best plan for you. If you are using the child's income from babysitting and lawn moving as their "earned income", or if you are planning to "hire your kids", you may end up triggering taxes due on their income.

Do my kids need to file taxes?

The official word from the IRS can be found here at Tax Rules for Children and Dependents. I’ve also summarized it below 3.

Keep in mind, if your child has a job and is working, it may be a good idea for them to file their taxes even if they are under the income limit requiring them to do so, as they may be eligible for a refund of some or all the taxes withheld from their paychecks.

Other Items to Consider

  • If the money will only be used to fund education goals, a 529 Plan 4 or Coverdell Education Savings Account 5 may be more tax-efficient than a Roth IRA and should be considered. Withdrawals from 529 plans for qualified education expenses are tax-free, and are not taxed year-to-year on interest / realized gains. Some states also offer a state income tax deduction on contributions to their state sponsored 529 plan.

  • Custodial Accounts (UTMA / UGMA) are accounts in the name of the child, but controlled by a parent or adult until the child reaches the age of majority for their state, after which the child has full control of the money. Interest and realized gains above $2,300 in 2022 are at the parent’s tax rate.

  • Some parents may decide to open a joint or individual account in their own (the parent’s) name, but keep it separate from their other investment and retirement accounts. It’s really just another account in their name, but perhaps earmarked for education or to give to the child when they are older (or a combination). This allows the parent to keep ownership and maintain maximum flexibility. Interest and realized gains are taxed at the parent’s rate in the year they occur. Dividend income and realized gains may be at a reduced rate, depending on your total income and the type of dividend/gain.

  • If parents want to maintain control of the assets and how they are disbursed as an inheritance, including stipulations, it is usually best to consult a qualified estate planner about establishing a customized living trust.

In Summary The Roth IRA might not be the best vehicle for every family to use for funding goals for the next generation, but it’s a great tool for the right family. As noted, there are limitations to accessing earnings from the plan without tax or penalties prior to age 59½. Contributions would be available, but not earnings, therefore it works better if only a portion of the funds will be needed at a younger age. Anyone employing the strategy should intend to leave the earnings in the account until after age 59½.

Also, it may work best for kids that already have W2 income to use for the income eligibility requirement. As mentioned, reporting self employment income such as babysitting or mowing lawns would trigger self employment taxes due.

For families that will be passing on money to their children or grandchildren and are comfortable giving control to the child at the age of majority, a Roth IRA can be an extremely tax efficient tool to do so.


  • No taxes year-to-year on interest and realized gains

  • Tax free withdrawals after age 59½

  • No Required Minimum Distributions at age 72

  • Contributions can be withdrawn tax/penalty free at any age


  • Withdrawal of earnings prior to age 59½ is generally taxable and subject to 10% penalty.

  • Child has full control of the assets at age of majority.

  • Child must have earned income to be eligible.

  • Reporting and filing a child’s self-employment income could trigger taxes due.


1 What are the exceptions to the 10% penalty on withdrawals of earnings?

  • Qualified education expenses are exempt from the 10% penalty but would be subject to income tax.

  • Up to $10,000 in earnings can be withdrawn both tax AND penalty free for the purchase of a first home as long as it has been five years since their first IRA was opened.

  • Other exemptions may also apply for qualified expenses for health care, health insurance premiums, birth or adoption of children and other events. (Investopedia does a great job of explaining them at THIS LINK)

2 If your child (or any single person) earns more than $129,000 in modified adjusted gross income in 2022 – good for them! That being said, they may not be able to contribute as eligibility is reduced at $129,000 MAGI and ends completely above $144,000. ($204,000 - $214,000 for married filing jointly in case you were wondering).

3 If your child’s “Self Employment” income is above $400, they are required to file and pay self employment tax, which would include babysitting and mowing lawns. By the letter of the law, you would need to file and pay taxes on self employment income a child uses to qualify for Roth IRA eligibility. This could be a potential cost and drawback to the Roth IRA for kids strategy.

If your child only has W2 earned income, they are only required to file if it exceeds $12,950 (in 2022). If your child only has unearned income such as interest and capital gains above $1,150 in 2022, they are required to file. If your child has both earned and unearned income, they are required to file if the amount is above the greater of $1,100 or $350 + their earned income.

4 529 Plans are an education specific investment account. There is no income limit for contributions, and no annual maximums. Both earnings and contributions can be withdrawn tax free for qualified education expenses, which includes kindergarten, technical school, college, grad school, books, room and board, computers and internet while in school… (there’s more). Non-qualified withdrawals are subject to tax and penalty.

Each 529 plan has a maximum allowed contribution which varies by state and ranges between $235,000 and $550,000. There is no federal tax deduction for contributions, but some states offer a state income tax deduction for contributions to that state’s plan. The plans are administered by state governments with investment management by mutual fund companies, with slight variations to the rules for each state. You can invest in any state’s plan, not only your own state’s plan, but you may be giving up that state income tax deduction I mentioned by investing out of state. To see your state’s status, check this link:

You can learn more about 529 Plans at Investopedia here: Another good resource is

5 Coverdell Education Savings Plans are another education specific investment account type, similar to 529 Plans. $2,000 is the annual maximum contribution per beneficiary. There is no tax deduction for contributions. Year-to-year interest or realized gains are tax free, and withdrawals for qualified education expenses are tax free. Slight variations exist between the definition of qualified education expenses for Coverdell ESAs vs. 529 Plans. Married couples with adjusted gross income over $220,000, or single filers with income over $110,000 are not eligible to contribute to a Coverdell ESA.

You can learn more about Coverdell ESAs at Investopedia here:

Other Disclosures:

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.

Limitations and restrictions may apply.

Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.



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