It's an American tradition to begin working at a tender age. What isn’t so traditional is the idea of kids contributing to their own IRA, especially a Roth IRA. However, it should be a tradition because it’s a good idea.
Here’s what you should know about IRAs for kids. Let’s start with the Roth IRA option.
Roth IRA Contribution Basics
The only federal-income-tax-law requirement for a child to make an annual Roth IRA contribution is to have enough earned income during the year to cover the contribution. Age is completely irrelevant.
So if a child earns some cash from a summer job or part-time work after school, he or she is entitled to make a Roth contribution for that year.
For both the 2021 and 2022 tax years, your working child can contribute the lesser of:
- his or her earned income for the year, or
While the same $6,000 contribution limit applies equally to Roth IRAs and traditional IRAs, the Roth option is usually better for kids.
A contribution for your child’s 2021 tax year can be made as late as April 15, 2022, or before the tax deadline.
Modest Contributions to Child’s Roth IRA Can Amount to Big Bucks by Retirement Age
By making Roth contributions for a few years during the teenage years your kid can potentially accumulate quite a bit of money by retirement age.
But realistically, most kids won’t be willing to contribute the $6,000 annual maximum even when they have enough earnings to do so.
Say the child contributes $2,500 at the end of each of the four years. Assuming a 5 percent return, the Roth account would be worth about $82,000 in 45 years. Assuming an 8 percent return, the account value jumps to a whopping $259,000. Wow!
You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your child approaches retirement age.