Is There a Roth IRA for Kids?
By Joseph King
, last updated July 29, 2011
An Independent Retirement Agreement (IRA) can come in two forms. There is the traditional IRA and the Roth IRA. The difference between the two is mainly in the tax arena. With a traditional IRA, any contribution made to the account is tax deductible. This is why a traditional IRA is not common for minors. Few of them make enough income for tax deductibility to be an issue. A Roth IRA is much more attractive for young people because it is still a tax-exempt retirement vehicle. Contributions to the account are not immediately tax deductible; however, qualified distributions made during retirement years are indeed tax-free. Withdrawals can also be made, tax-free, once the minimum age of 59 and ½ is reached.
Roth IRA’s do in fact exist for minors. There is no minimum age to set up a Roth IRA and many providers will accept accounts for minors. The only issue is whether or not the child has a taxable compensation income, i.e. they must have some kind of job that provides them taxable income. Setting up a Roth IRA for your kid is a great idea and provides several advantages and disadvantages to consider before making your decision.
One of the biggest advantages provided is a tax-free compounding of earnings. The longer you can keep your money tax free, the greater your wealth accumulation. Starting early is another advantage. The earlier you start compounding earnings the more wealth you will accumulate.
One of the biggest disadvantages is the money will be in your child’s name and they can withdraw it and use it however they please once they reach the age of majority. Be careful whose money is placed in the Roth IRA, it does not have to be money earned from the taxable income (it can be from anywhere). The child only has to have proof of a job that pays taxable income and any kind of contribution in any amount can be made to the IRA.