If you child or grandchild has earned income, then he or she can open a Roth IRA and make annual contributions. While the kid/child needs to have earned income in order for contributions to be made, the contribution can come from their parents, uncles, god parents or any other individual. The Roth IRA regulations do not require that the contribution is made from a check coming from an IRA owner’s bank account. Anyone can technically write the check for a valid Roth IRA contribution, as long as the Roth IRA owner qualifies.
Earned Income for Kid/Child Roth IRA
Distributions from Kid/Child Roth IRA
A Roth IRA for a kid/child also allows for distributions of the basis (contributions) tax and penalty free before age 59 ½. What is more, once the kid/child reaches age 18, he or she can also distribute the gains (earnings) without having to pay the 10% early distribution penalty if the funds are used to pay for college tuition; however ordinary income taxes would still apply.
The prior year kids Roth IRA contribution must be made by April 15 of the following year even if a timely filed tax extension was filed. For example, the 2018 Kid/Child Roth IRA contribution has to be made by April 15, 2019 not October 15, 2019.
- The 2018 contribution limit to a kid/child Roth IRA is $5,500 or the amount of compensation, which ever is less.
- See IRS publication 929, Tax Rules for Children and Dependents for reporting and paying taxes on kid/child income.
- The tax code does not require a minimum age for opening a Roth IRA. While minor cannot legally sign the forms for establishing a Roth IRA, the child’s parents or an adult can open the Roth IRA for the kid.