Roth IRA for a Child

[Guest King]

I pay my 10 year old child for doing chores and jobs at home. Can my child use this earned income to start a Custodial Roth IRA? Is there an age limit for children to open a Roth IRA?

[John G]

There is no age limit for Roth or regular IRA for a child.... atleast not from IRS regulations. However, you will have to check with a few custodians as some are not accepting accounts for children. Don't know why some decline the business, just keep asking and you will find someone (Schwab says yes, we should probably have a list on this site!)

The real issue is "earned income". I believe you can hire a child... but you have to do everything you would if you hired an adult. Pay ALL the applicable taxes. Keep records. Keep some documentation on what the child does for the pay.... and it better pass a basic reality check. Remember, dividends and interest do not count.

There are lots of ways kids get earned income: modeling, local newspaper delivery, babysitting, etc. The Roth is a great shelter. Starting early in life makes it an even better idea. Good luck.

[Guest Steve Hample]

John G gave excellent advice. He wondered about one point.

Some custodians decline the business of IRAs for minors for a traditional reason. The minor has greater, unequal protection under the law compared to the IRA custodian firm. The custodian cannot back out of the deal while the minor can. No problem if the value of the IRA increases, but if the market drops or if the IRA is invested in individual stocks that drop, then the minor could ask for the original investment back and stick the custodian with the loss.

Not a likely event, particularly with mutual funds invested over a period of time. But attorneys advising IRA custodians have thought of this and some, but not all, custodians therefore wrote policy manuals to decline IRAs for minors.

That's my guess, though I've never gone to law school.

Steve Hample, CFP

[BPickerCPA]

Any IRA for a minor would be set up as a custodial account, so I don't think your reason is valid.