Dollar for dollar, a Roth IRA is almost always the best retirement account you can have. They have lower contribution limits than a traditional 401(k), but other than that the advantages of this after-tax account can’t be beaten. If you have one and haven’t met your annual contribution limit, go put some cash in right now. If you don’t have one, open one. And the good news is, you can do that no matter how old you are because there are no minimum age limits to open a Roth IRA. Here’s how it works. You may also want to consult with a financial advisor before deciding to move forward.
What Is a Roth IRA?
A Roth IRA is a form of tax-advantaged retirement account. This means that it’s an investment portfolio that receives special tax treatment by the IRS in exchange for keeping your money in place until you approach retirement age.
In the case of a Roth IRA, you receive what’s known as a “post-tax” portfolio. Unlike an IRA or a 401(k), you do not get a tax deduction for the money you put in this portfolio. You pay full taxes on this money upfront. But, when you withdraw the money later in life, you do not pay any taxes on the account’s gains.
This makes a Roth IRA enormously valuable on a dollar-for-dollar basis. For example, say that you have two portfolios, a standard IRA and a Roth IRA. You put $100 in each account and each grows to $2,500 over your working life. You pay 10% income taxes at all times.
With the standard IRA, you would save $10, because you would pay no taxes on the $100 that you invested upfront. Then, when you withdraw the money, you would pay 10% income tax on the $2,400 gains, coming to $240 in taxes.
With the Roth IRA, you would pay the $10 in taxes on that initial investment. Then, when you withdraw the money, you would pay no taxes on the $2,400 gains. The Roth IRA is more expensive up front, but the benefits can be enormous in the long run.
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Can Young Adults Open a Roth IRA?
Yes. Anyone over the age of majority can open their own investment portfolio, including a Roth IRA. In most states that’s 18 years old although a handful of jurisdictions set the age of majority higher, typically 19 or 21.
The rule of thumb is that you must be legally old enough to enter a contract under your own authority. Once you reach that age, you are legally allowed to buy public investments and you can classify those investments as a retirement account.
The critical issue for a Roth IRA is what’s called “earned income.” You can only contribute to a Roth IRA with earned income. This is taxable income that you received in exchange for working for someone else, working for yourself or operating a business. To use the IRS’ formal definition:
“Earned income includes all of the following types of income:
Wages, salaries, tips and other taxable employee pay. Employee pay is earned income only if it is taxable. Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. But there is an exception for nontaxable combat pay, which you can choose to include in earned income, as explained below.
Net earnings from self-employment.
Gross income received as a statutory employee.”
As a rule of thumb, if you paid or owed payroll taxes it typically qualifies as earned income.
This creates two effective caps for Roth IRA contributions. First, the IRS has an annual contribution limit. For example, in 2023 you can only contribute up to $6,500 to a Roth IRA account. Second, you can only contribute to a Roth IRA account up to the value of your earned income for the year. So, for example, if you only earned $5,000 in 2023, you can only contribute up to $5,000 to a Roth IRA.
Can Minors Open A Roth IRA?
Minors cannot open their own Roth IRA, but they can have one opened on their behalf. For the purposes of investment, a minor is anyone under the age of majority in their jurisdiction. This means that they are too young to sign contracts under their own authority. As noted above, in most jurisdictions, this is age 18, although in a few states, this is age 19 or 21.
Minors typically cannot open any investment account on their own and that includes a Roth IRA. Instead, to open an account on a child’s behalf, you would open what’s known as a “custodial account.” With a custodial account, the minor child is the legal beneficiary of the account’s funds. This means that the funds can only be used on the child’s behalf, which typically restricts access just to making trades within the portfolio.
An adult must open and supervise the portfolio, however. The custodial adult is the one who funds the account, makes investments, establishes any distributions and makes all other decisions about managing the portfolio. Basically, an adult manages the portfolio on the minor child’s behalf until they are old enough to take over.
Earned Income Rule Applies To Custodial Accounts
A custodial account can be designated as a Roth IRA but you can only make contributions to the account if the minor child had taxable, earned income during the year. Moreover, you can only make contributions to the account up to the amount of that earned income. This tends to create more flexibility for teenagers than younger children. A high school student may well have a summer job that gives them the chance to earn some money, while an eight-year-old probably won’t have similar opportunities.
This creates both opportunities and pitfalls. The good news is that even relatively informal employment generates earned income. For example, if your child makes money from walking dogs, babysitting or shoveling the neighbor’s sidewalk, all of this can qualify as earned income for making contributions to a custodial Roth IRA.
What’s more, you don’t have to actually use the same pot of money. The rule is only that contributions cannot exceed the beneficiary’s earned income for the year. So, for example, say your child made $1,000 babysitting in 2023. You can contribute $1,000 to the custodial Roth IRA on their behalf and let them keep the $1,000 that they earned.
The Bottom Line
There is no age limit for a Roth IRA. Anyone who is over the age of majority in their jurisdiction can open an account on their own behalf. Anyone who is younger than this can have a custodial account opened for them, so long as the contributions don’t exceed that year’s earned income.
Roth IRA Tips
If you’re looking to open a Roth IRA for your child then you may want to consult with a financial advisor who can help you make the smart decision. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
While the decision to open a Roth IRA can be a good idea for everyone, it’s important to know what you’re getting into. Consider these important aspects of opening a Roth IRA.
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