Why open a Roth for kids?

Roth IRAs can jumpstart retirement savings for kids, regardless of age, if, and only if, they have earned income. It can be a platform to introduce important financial topics to high school or college students. (Think savings, tax-free vs tax-deferred vs taxable, compounding, investing, etc.)  Parents/grandparents can make the Roth contribution on the child’s behalf only if the child has earned income and only up to the gross amount of their earnings annually.

The Roth contribution limit for 2023 is $6,500.  A single tax filer must have a modified adjusted gross income (MAGI) of less than $153,000.  The biggest benefit of funding a Roth at an earlier age is the opportunity for these earnings to compound over a much longer timeframe. The best part is that Roth contributions can be withdrawn at any time (but not the gains on the contributions).   

Acceptable earnings include: 

• Earnings from a W-2 job where the company is owned by someone other than the parents. 
• Earnings from a W-2 job where the company is owned by the parents. 
• Self-employment earnings. 
• Reasonable household employee earnings from friends and neighbors (babysitting, lawn mowing). 

As you might imagine, documentation is important and depending on the amount of income earned, a child’s tax return may need to be filed. 

Unacceptable earnings include: 

• Gifts (monetary, stock, bonds) 
• Allowance for chores 
• Interest, dividends 
• Passive partnership income, rent 
• Parent’s earnings 

There is no charge to open a Roth IRA and we can help facilitate this for you at Charles Schwab. If you have additional questions, please email jenifer@mosaicfi.com.