Don't Overlook Roth IRAs for Children and Grandchildren

What You Need to Know

Roth IRAs are particularly attractive for younger savers due to the potential for significant tax-free growth.
Clients whose children and grandchildren worked summer jobs may be particularly interested in funding a Roth account.
However, it’s important to understand the basic mechanics of these accounts to avoid penalty taxes.

With that the end of summer — and start of a new school year — quickly approaching, now may be the perfect time to encourage a child or grandchild to jump-start their savings program and learn to manage their finances.

While retirement accounts are often overlooked as a savings option for the younger generations, Roth IRAs are particularly attractive for younger savers because of the potential for significant tax-free growth, potentially over a period of decades.

Clients whose children and grandchildren worked summer jobs may be particularly interested in funding a Roth account to save for retirement, college or even the purchase of a first home down the line. However, it’s important to understand the basic mechanics of these accounts to avoid penalty taxes.

Roth IRAs for Kids and Grandkids: The Basics

Many clients overlook the Roth IRA option for children and grandchildren because these Roth accounts are obviously geared toward retirement saving — and saving for retirement for a child almost always takes a backseat to saving for education. However, in reality, these accounts can provide a powerful savings tool.

The only restriction on funding an IRA is that the individual must have earned income for the year. In 2023, an individual under age 50 may contribute the lesser of (1) his or her earned income for the year or (2) $6,500. Therefore, if a child had a summer or part-time job that generates earned income, that child is eligible to open and contribute to a Roth IRA for the year.

If the child is a minor, the Roth IRA is technically established by the minor child’s parent or grandparent as a custodial account, with the adult acting as custodian and the minor as the account holder. Once the funds are transferred into the Roth account, the transfer is irrevocable (i.e., the funds cannot later be transferred into an account for another individual). Once the child is no longer a minor, the funds become theirs to control.