Is your money working as hard as it could be?

Are you earning too little and giving too much of the earnings to Uncle Sam?

Then it might be time to revisit the ROTH IRA.  In particular Roth IRA’s for children. 


Recently a client asked me this question: Does parental income affect a dependent child's Roth IRA contributions? 

I thought it would be a good time to explore some of the rules. 

Many times a grandparent or family relative wants to set up a Roth IRA for his grandchildren or niece/nephews.  The family relative might provide the funds to deposit to a Roth IRA account either by directly gifting the funds or by initiating a “matching” program (great idea!!)  So, the question is, does the parent’s income, as the parent claiming the child as a dependent, affect the dependent child's eligibility?

The answer is, a child must have his or her own earned income to qualify for a Roth IRA contribution in the year for which the contribution is made. But, he or she does not have to have a W-2 to justify opening the IRA.  Many children do informal jobs for which they are paid and the total of this income can be used as a contribution.  The parent or grandparent can provide funds for the child to contribute.  If the IRS ever asks about this income (which is unlikely) be prepared to show a journal of the income received to document the amount.  It's a good idea to do this at any rate and to keep an ongoing journal record.  The child needs to know the amount of income they earned even if they are not required to make a tax return for the year they make the contribution. This record ensures they contributed only up to the amount earned or the IRA contribution limit for the year (whichever is less).  Roth contributions are not reported on the tax return, but in the long run it is best to know the full amount of actual contributions versus earnings from investments. This is important in the event the money is used before the child’s retirement as Roth withdrawals are potentially taxed if the rules are not followed.

The difference between the old fashioned savings bonds and the tax free savings growth in a Roth IRA can be staggering when you consider the length of time of the investment.  Add to that the potential growth of a well balanced mutual fund investment and your child can have a well planned retirement no matter what the future tax policies might look like.