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Can Minors and Seniors Have a Roth IRA?

A Roth IRA is one of the most flexible types of retirement accounts ... if you understand the rules. Here's what seniors and the parents of minors need to know.

By
Laura Adams, MBA
Episode #595
Can Minors and Seniors Have a Roth IRA

A Roth IRA is one of the most flexible types of retirement accounts if you understand the rules. Does that mean that a Roth retirement account can work for both seniors and minors?

A Florida voicemail caller named Kathy says, “I’m 69 years old and still working. Can I start a Roth IRA? If so, are there any restrictions for starting at this late date?”

And a Money Girl podcast listener named Adrian V. has a question about using a Roth IRA much earlier in life. He says, “On your podcast, you mentioned the benefits of a Roth IRA. I want to open one for my 10-year old daughter. I understand that she must have earned income in order to qualify. She’ll be doing babysitting and dog walking and won’t earn more than $1,000 per year. How can I document her income to avoid any trouble with the IRS?”

Those are both fantastic questions. Let's take a look at what seniors and the parents of minors need to know about using a Roth retirement account the right way.

Roth IRA Rules for Seniors

Let’s review important information about traditional and Roth accounts that apply to anyone over age 70½, whether you’re still working or not.

Traditional retirement accounts allow you to skip paying tax on contributions and investment earnings until you take withdrawals in retirement. Roth accounts have the opposite taxation because you must pay tax up front on contributions. However, you can withdraw both contributions and earnings completely tax-free in retirement—as long as you’ve owned the account for at least five years.

With most retirement accounts, you must begin taking withdrawals by April 1 of the year after you reach age 70½. These are known as required minimum distributions (RMDs).

Once you start taking RMDs from a retirement account, you can no longer make any new contributions to it.

You don’t have to take any money out of a Roth IRA if you don’t want to. You can use it as an estate planning tool by passing it along to your heirs as a tax-free inheritance.

But with a Roth IRA, there are no RMDs. You don’t have to take any money out of a Roth IRA if you don’t want to. You can use it as an estate planning tool by passing it along to your heirs as a tax-free inheritance.

Plus, you can continue making contributions to a Roth IRA after reaching age 70½. For 2019, you can contribute up to $5,500 to either a traditional or a Roth IRA. If you’re over age 50, you can contribute up to $6,500. But as I mentioned, once you’re over age 70½ you can only make new contributions to a Roth IRA.

But there’s a big sticking point that can put a Roth IRA out of reach. It comes with an annual income limit that may eliminate or reduce the amount you can contribute. Here are the 2019 income thresholds to qualify for a Roth IRA, no matter your age:

  • If you file taxes as a single and your modified adjusted gross income is higher than $137,000, you cannot contribute to a Roth IRA. If you earn from $122,000 to $137,000, a contribution is allowed but will be less than the $5,500 or $6,500 limits that I mentioned.  
  • If you’re married and file taxes jointly, you cannot contribute to a Roth IRA when your household’s joint modified adjusted gross income exceeds $203,000. If you and your spouse earn from $193,000 to $203,000, your contribution limit is reduced.

Roth Rules for Working Seniors

If you’re a senior like Kathy who’s still working, there are other Roth accounts that don’t have annual income limits. Again, the Roth IRA is the only type of retirement account that limits participation based on income.

You might have an employer that offers a Roth 401(k) or a Roth 403(b). Neither of these accounts locks you out based on income. And if you’re self-employed, you could contribute to a solo Roth 401(k) no matter how much you earn.  

Additionally, the annual contribution limits for workplace and self-employed accounts are much higher than for IRAs. For 2019, you can contribute up to $19,000 or $25,000 if you’re over age 50, allowing you to save much more.

The only drawback to using a Roth at work or as a business owner is that they are subject to the RMD rules starting after age 70½, even though the withdrawals are not taxable.

However, if you’re still working for the employer past age 70½ you may be able to delay taking RMDs. Once you leave an employer or retire, it’s easy to avoid RMDs and continue making contributions by rolling over your workplace Roth to a Roth IRA.

While you might think that Roth contributions are best for young people, they’re great for older people, too.

While you might think that Roth contributions are best for young people, they’re great for older people, too. A Roth allows seniors to make investments and then take them as tax-free income. That’s a nice benefit to have when you may be living on less income in retirement or simply want to spend more of your income enjoying life, instead of on taxes.

Another benefit is that Roth withdrawals are not counted in income calculations that determine other benefits such as how much tax you must pay on Social Security retirement income and Medicare premiums.

Getting back to Kathy’s question, the answer is a definite yes, you can start a Roth IRA. The only restriction is the annual income limit that I reviewed. But if you earn less than the threshold for your tax filing status, you can max out a Roth IRA.

The only downside to opening a Roth IRA later rather than sooner is the five-year rule. This requires you to own a Roth IRA for at least five years before withdrawing the earnings portion of the account. However, you can withdraw your original contributions from a Roth IRA at any time without tax consequences.

So, if Kathy qualifies for a Roth IRA, I’d encourage her to open one as soon as possible. That starts the clock and reduces the likelihood that she could be restricted from withdrawing her earnings from the account due to a waiting period.

Free Resource: Retirement Account Comparison Chart PDF is a handy, one-page resource to understand the different types of retirement accounts. Click here to download the PDF!

Roth IRA Rules for Minors

Now we’ll change gears and address Adrian’s question about opening a Roth IRA for his 10-year-old daughter. I love that he’s thinking ahead! Many people don’t realize that kids can have a retirement account.

Imagine that you help your child put $500 in an IRA every year from age 10 to 20. Even if he or she never contributes another penny to the account, at age 65, assuming an 8% average return, the account would be worth close to $250,000.

If your child did continue to make annual contributions of $500 per year from age 20 to 65, his or her IRA would be worth about $425,000. If they could contribute $1,000 per year starting at age 20, there’d be more than $600,000 in the account. Try $5,000 a year and the account would exceed $2 million!

If parents have a little foresight, they can put a child on the right path by showing them that when you make investing a habit it’s easy to create financial independence. But parents have to follow a few rules.

But if you don’t get started until middle age and only have 20 years before retirement, you’d have to invest more than $13,000 per year to accumulate $600,000. The more time your money can grow, the easier it is to build wealth.

If parents have a little foresight, they can put a child on the right path by showing them that when you make investing a habit it’s easy to create financial independence. But parents have to follow a few rules.

The main hurdle you and your child must jump in order to qualify for a retirement account is receiving taxable income. Your child can contribute as much as he or she earns per year, up to the annual limit of $5,500. For instance, if your child earns $2,000, the most you can contribute to an IRA on his or her behalf for the tax year is $2,000.

But the tricky part about IRAs for minors is that their earned income must be documented. That means you can’t fund an IRA for an infant or toddler who can’t legitimately earn income. Nor can you pay an 8-year-old a cash allowance for household chores and call it income for the purposes of an IRA without proper documentation. You also can’t pay kids an outrageous rate, like giving your teen $1,000 to wash your car, and then put it in an IRA.

See also: 4 Penalty-Free Ways to Use a Roth IRA Before Retirement

Income That Qualifies Minors for a Roth IRA

So, let review what Adrian needs to know to make sure he complies with IRS rules for his daughter’s future Roth IRA. Kids must earn an allowable type of income, including:

  • wages 
  • tips
  • commissions 
  • scholarship payments 
  • self-employment income

You’ll notice that I didn’t include interest or investment income because they don’t count for the purposes of an IRA.

Older kids may have a part-time job during the school year or full-time work during the summer. If they receive a paycheck with taxes deducted, that makes it easy to document earnings.

See also: 10 IRA Facts Everyone Should Know

Using Self-Employment Income to Qualify a Minor for a Roth IRA

But what about kids like Adrian’s daughter who will likely get paid in cash for babysitting and dog walking? Or kids who receive a Form 1099 at the end of the year? As I mentioned, self-employment income does qualify minors for an IRA.  

For a child’s self-employment income to count toward IRA eligibility, you or your child must file an annual tax return. You’ll use Schedule C or Schedule C-EZ to report the income and any related expenses for your child’s business as a sole proprietor.

His or her net amount of income or loss gets entered on Form 1040, U.S. Individual Income Tax Return. And no matter your age, if your business earns $400 or more, you must also pay the self-employment tax, which covers Social Security and Medicare, using Schedule SE.

Filing taxes is the lawful way to handle the income and the only way to prove that a child qualifies for an IRA.

I know paperwork may seem like a hassle, especially if your child isn’t going to make more than $1,000. But filing taxes is the lawful way to handle the income and the only way to prove that a child qualifies for an IRA.

Additionally, keep detailed records, such as a spreadsheet that lists the date, type of work, and the amount paid to the child so there’s no question about the legitimacy of the income.

Even though your child must have earned income to justify IRA contributions, what gets deposited into the account doesn’t have to come from his or her money. In other words, it doesn’t matter where the money for a kid’s IRA contribution comes from as long as it doesn’t exceed the amount your child earned during the tax year.

Let’s say Adrian’s daughter makes $1,000 this year. Adrian could let her keep the money and put up to $1,000 of his own money into the account on her behalf. IRA contributions can be made at any time during the tax year up to the following April 15.

See also: 4 Ways to Start a Retirement Account as a Self-Employed Freelancer

How to Open a Roth IRA for a Minor

An IRA for a minor is known as a custodial IRA or a guardian IRA. It's easy to open at most major banks, brokerages, and investment companies such as Betterment and TD Ameritrade.

The account will be in your child’s name, but you or another adult will manage it until your child turns 18, or 21 in some states. Just like with a regular IRA, the financial institution may require a minimum amount to get started, such as $50 or $100.

Kids can also have a traditional IRA; however, they typically don’t earn enough to benefit from the up-front tax deduction that comes with it. So, a Roth IRA gives minors the best tax advantages.

See also: 7 Simple Reasons to Invest in a Roth IRA or Roth 401(k)

How to Make Penalty-Free Withdrawals from A Roth IRA

In addition to the tax benefits of a Roth IRA for minors, they offer more spending flexibility than a traditional IRA. As I previously mentioned, you can tap a Roth IRA before retirement without penalty.

That means you can use a portion of a Roth IRA to pay for college, travel, or anything your child may need. Of course, it’s always better not to make withdrawals from a retirement account so it can grow as much as possible.

The sooner you instill the importance of making saving a habit, the better off your child’s finances will be for life.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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