What is a Roth IRA?

An allowable retirement investment vehicle that many people use and is based on United States tax law is a Roth IRA or Individual Retirement Account. The late Delaware US Senator, William Roth, was the primary legislative sponsor of the measure that was passed to create these types of accounts, hence the name “Roth IRA.” Be aware that there are significant differences between this type of IRA and others that are available.

Many people do not realize that you can open a Roth IRA for anyone in your family, including your children. There are a few requirements which may need to be met when opening an account, depending on which family member it is that you are opening the account for. To get a better idea as to how advantageous or disadvantageous this is based on who the beneficiary is, you should visit the IRS website and investigate this.

The rules governing opening up a Roth IRA for a child

In answer to the question as to whether or not you can open up a Roth IRA account for your child it basically comes down to one thing. Unless your child is either a child actor or a TV performer, chances are you cannot open an IRA for your child. Despite the fact that this is not a hard and fast rule, you should probably consider opening some other type of savings plan for your children.

Typically, a Roth IRA account can only be opened for a child that has earned income. Additionally, any unearned income resulting from an investment or a savings account typically doesn’t count towards this requirement. Conversely, for those children who can qualify for this type of IRA, they will be far better off with this option than with a traditional IRA account. Since their income is no doubt smaller than most others, they won’t benefit that much from contributions to a traditional IRA which are tax-deductible.

There are a number of ways in which a child can earn an income such as finding a part-time summer job, babysitting, or having a newspaper route. Since babysitting and lawn mowing jobs usually do not result in the child receiving a W-2 for wages earned, accurate record keeping is imperative. You’ll want to list the amount of the payments received for those services rendered, the dates that they were paid for said services, and who the employer was. Any other facts pertinent to the child’s earnings should be listed as well.

Maximum allowable contributions

The allowable maximum contribution to any Roth IRA account is $4,000 annually. Your child has the option of contributing their entire annual income to their Roth IRA account or $4,000 each year, based on which sum is the lesser of the two amounts. So if your son or daughter only earns $3,500 per year, they are allowed to contribute every penny of that income into their Roth IRA account. Just consider the qualifying criteria mentioned above.