To be eligible for a Roth IRA with custody, your child must earn income. It doesn't matter if they work for an employer or provide services such as child care. As long as your child earns money and pays taxes on them, they can contribute to a custodial Roth IRA. The important thing to remember is that your child must have earned income from work during the year in which a contribution is made.
Money from an allowance or investment income is not counted as earned income and therefore cannot be used to make contributions. The child must have earned income. If a child has earned income, they can contribute to a Roth IRA. The IRS defines earned income as taxable income and salary, money earned from a W-2 job or self-employment, such as taking care of children or walking dogs.
If you want to contribute to your child's Roth IRA or match your child's contributions, that's fine as long as you have at least as much earned income as the total amount of the contribution. A custodial IRA is an individual retirement account that a custodian (usually a parent) has for a child with earned income. Once the custodial IRA is opened, the custodian manages all the assets until the child turns 18 (or 21 in some states). All of the funds in the account belong to the child, allowing them to start saving money right from the start.
In addition to taking advantage of the benefits of combined growth, your child may be able to use the funds for future expenses, such as college tuition or even to buy a first home. You can open a Roth IRA with custody or a traditional IRA with custody, and the appropriate account rules and benefits will apply. Anyone of any age can open a Roth IRA. And anyone of any age can contribute to a Roth IRA as long as they have earned income.
Earned income, according to the Internal Revenue Service, is money that can come from salaries, tips, bonuses, commissions and self-employment. In general, the Roth IRA is the preferred IRA for children who now have limited incomes, as it is recommended for those who are likely to be in a higher tax bracket in the future. The same contribution and distribution rules that apply to traditional and Roth IRAs also apply to custodial IRAs. If you're ready to create a Roth IRA for a child, the first step is to contact a brokerage agency that offers Roth IRAs for minors.
Roth IRA providers usually require an adult to open and manage a Roth IRA with custody on behalf of a child. Next, we'll look at two types of IRAs for children, the benefits offered by these tax-advantaged investment instruments, and how to open and make contributions to an IRA for children. While you might see brokers touting a Roth IRA for children (like Fidelity Investments does) or some like that, there's nothing special about the way a child's IRA works, at least when it comes to the IRS.