Meritage Periodical May 2025

Prompting critical thinking and conversations around issues in our industry.
Not intended as personal financial advice.

Help Your Kids or Grandkids Get a Head Start on Retirement

A common regret for many investors is that they didn’t start saving for retirement at a younger age. The earlier contributions are made to a retirement savings account, the more time those savings have to grow. If you’re able to make Roth IRA contributions, they represent an extremely efficient way to save for retirement. Wouldn’t it be great if your children could take advantage of a Roth IRA and start saving in their teenage years? The good news is that they may be eligible to open a minor-owned Roth IRA to start their savings journey.

The registration process for opening a minor-owned Roth IRA varies from provider to provider, but the account is typically opened as a custodial Roth IRA. The child is the account owner, with an adult serving as the custodian. Contributions are reported to the IRS under the minor’s social security number, but the custodian completes the new account paperwork and is the individual authorized to act on the account. The custodian is usually (but not always) a parent. Providers may have additional requirements if someone other than a parent serves as the custodian.

There is no age requirement to make a Roth contribution—the same eligibility rules apply to both adults and minors. Once the child reaches the age of majority (either 18 or 21 depending on the state), the funds must be transferred into a Roth IRA in the adult child’s name. Subsequently, the adult child is authorized to manage the account.

The minor must have earned income to make a Roth contribution. A child with a part-time job after school or summer employment is a prime candidate. Ideally, your child’s employer will issue a W-2 for the work performed. But what if your child isn’t employed with a company but does neighborhood work, such as mowing lawns, shoveling snow, or babysitting? Is the money received considered earned income? The answer is, maybe. It’s up to you to document that your child received earned income and that the amount is reasonable. For example, you could not pay your child $1,000 for two hours’ worth of babysitting. Consultation with a tax advisor or CPA is recommended if you’re unsure whether your child’s work can be substantiated as earned income and if the pay is reasonable.

The total amount minors can contribute for a year is $7,000 (for 2025) or 100 percent of their earned income, whichever is less. A commonly asked question is, must the contribution be made with the income earned by the child, or can it be funded with a gift from a parent or family member? Either option works, as long as they have the earned income to support the contribution. Keep in mind that the IRS imposes limits on tax-free gifts. 

Roth IRAs provide tax-free growth of funds for use in retirement (post age 59 ½). They also provide some wonderful flexibility to access funds prior to retirement years, but the rules involve some complexity that is beyond the scope of this piece. We can help you understand these details if this is something you’d like to explore for yourself, your children, or your grandchildren.