Yes, but to be eligible for a
Roth, a child has to have earned income from a job. Investment income doesn't count, nor does an allowance or sporadic payments for chores kids do around the house. For children who qualify, opening a Roth is
almost a perfect plan because kids most likely won't owe taxes on the money when they earn it, and withdrawals won't be taxed, either.
No. While the IRS has not issued much official guidance on this subject, it's the consensus of tax professionals that neither allowance nor payment for chores that kids typically do around the house count as "earned income" for purposes of opening a Roth IRA.
A more formal work arrangement at home -- such as being employed by a family business -- or doing jobs for other families would be okay. But if they don't have a W-2 form to report their earnings, they should at least keep a careful written journal or an ongoing log of their jobs and what they earn.
Are there limits on gifts given to children to establish a Roth?
You can only make a gift equal to the amount of the child's earned income (up to the $4,000 limit).
For grandparents interested in getting their grandkids started on a long-term savings plan, it's "cleaner" to make a gift to the grandchildren or their parents and let them open the account rather than having Grandma and Grandpa set it up themselves.
You don't report Roth contributions to the IRS. But if the child earns $400 or more from self-employment, a return must be filed to pay the 15.3% social security tax.
Although a teen who earns money mowing lawns is probably subject to this tax, babysitters under age 18 (who are usually considered employees) are exempt. Newspaper carriers under age 18 also get a special break that exempts them from paying social security tax.
The IRS hasn't issued much official guidance about IRAs for kids. But the amounts of money involved are generally so small, and the potential benefits so large, that it's worth taking full advantage of the opportunity.
GETTING STARTED
