Exploring the details of IRAs for kids
If your kids aren’t saving for retirement, don’t worry. You haven’t completely failed them. Yet. As a mom to three young adults, I already know there are hundreds of ways to do that every day.
I also know there’s more than one way to set your children on a path to financial literacy — and you don’t have to wait. Once you’ve secured the savings accounts and child debit card, what else is there? Plenty. But for today, let’s talk IRAs. They’re not just for crusty grown-ups. And they’re not just for retirement (don’t let the name fool you).
Setting up an Individual Retirement Account (IRA) for your child is a strategic, savvy way to get them involved in their financial future and set the stage for substantial long-term growth. Let’s dive into some questions about setting up an IRA for a child, the types suitable for kids (minors), contribution limits, potential drawbacks, and other options for savings and investments.
By the way, here’s my disclaimer: I’m not a financial advisor; my experience and research drive these insights. Your results or opinions may vary. But most of all, please consult your financial advisor when deciding these things.
Can I set up an IRA for my child?
Yes, as long as they have earned income. Lucky for you and your kids, the Internal Revenue Service (IRS) defines earned income as wages, salaries, tips, or other amounts received for providing personal services.
This includes income from part-time jobs, working for the family business, babysitting, lawn mowing, freelance writing, or any other work where compensation is received (no matter what their attitude was while doing it).
Sorry, but allowances and monetary gifts from the grandparents or anyone else do NOT qualify as earned income.
If your child is a minor, you can open a custodial IRA on their behalf, managing it until they reach the “age of majority” (typically 18 or 21, depending on state laws).
Why would I open an IRA for a child?
While worrying about your own retirement, thinking about your child’s can be ludicrous —especially if they’re still in braces.
Beyond teaching your child about financial literacy and safeguarding their long-term financial wellness, there are other tangible benefits:
- Home sweet home. Your child can withdraw up to $10,000 from their IRA to use as a down payment when purchasing a house. There is no early withdrawal penalty for first-time homebuyers. If their spouse also has an IRA, they can withdraw up to $20,000 combined.
- Compound interest, baby. With the power of compound interest, funds invested in an IRA could double in value every 7 to 12 years.
Say Junior is 11 years old and you put $1,000 into his IRA today. If you don’t touch that account, and it doubles in value every 7 years, the money will have doubled three times by the time he’s 32 years old.
- Age 18: $1,000 doubles to $2,000
- Age 25: $2,000 doubles to $4,000
- Age 32: $4,000 doubles to $8,000
An initial $1,000 has the ability to ‘make’ $7,000 in 25 years through compound interest. And if you left those funds untouched until age 67, at this rate, Junior’s $1K would grow to $256,000 — quite a nice legacy to leave him.
This is just one hypothetical scenario. Past performance does not dictate future results. In a less aggressive scenario, the IRA may take 10 years to double or it could underperform in a down market. Historically though, IRAs have seen annual returns of 7% to 10% — significantly better than the average national savings account rate of ^0.43%.
^Based on data from the FDIC, 0.43% was the current rate of interest for deposit savings accounts as of the date of this article’s publication.
What is the best IRA to open for a child?
Many advisors will say that a Roth IRA is the most suitable option for children. Contributions are made with after-tax dollars*, and qualified withdrawals in retirement are also tax-free. That’s perfect for cherub investors who will undoubtedly be in a higher tax bracket in the future. Given that kids typically have little to no taxable income, the immediate tax deduction offered by a traditional IRA is less beneficial. The Roth IRA delivers an ideal combination of long-term growth potential and tax advantages.
* In 2024, the standard deduction for single filers is $14,600. In 2025, the figure raises to $15,000. If your child makes less than the standard deduction amount, they may not have to pay any federal taxes.
What’s the minimum age for an IRA?
There is no minimum age requirement to open an IRA. As mentioned earlier, the account must be established as a custodial IRA, with a parent or guardian managing the account until the child reaches the age of majority.
How much can a parent contribute to a child’s IRA?
The contribution limits for a child’s IRA are the same as for adults. The maximum contribution for the 2024 tax year is the lesser amount of $7,000 or the total amount the child earned for the year. (For 2025, the contribution limits remain the same.)
For example, if your child earns $3,000 in a year, the maximum contribution to their IRA would be $3,000. Contributions can’t exceed the child’s earned income, which could result in penalties.
Bonus note for older parents: the annual IRA contribution limit for geezers over 50 is $8,000. Individuals 50 or older can contribute up to $8,000 toward their own IRA; older parents cannot contribute $8,000 to their minor child’s IRA.
Are there any disadvantages of a custodial IRA?
As with any investment, your decision should be weighed against the full scope of your financial assets, debt, goals, and risk tolerance. For custodial IRAs, remember these considerations:
- Control transfer: When your child becomes old enough, they get full control of the account and can use the funds at their discretion. In other words, little Johnny might not use that money for the original intent of long-term retirement savings. Are you good with that?
- Financial aid impact: Assets in a custodial IRA are considered the child’s property and may affect eligibility for financial aid because they factor into the Expected Family Contribution (EFC) on the Free Application for Federal Student Aid (FAFSA). Most colleges and universities require the FAFSA information to develop a financial aid offer, and a qualified financial advisor can help decide how a Roth IRA fits into your big picture.
- Contribution Limits: Contributions are limited to the child’s earned income, which may be minimal and restrict how much they can invest each year.
Are there other financial investments for a child?
Of course! Other investment options for your child’s financial future include:
- 529 College Savings Plans: These plans offer tax advantages for education expenses, allowing contributions to grow tax-free when used for qualified educational costs.
- Custodial Brokerage Accounts (UGMA/UTMA): These accounts allow investments in stocks, bonds, and mutual funds, with the assets transferring to the child at the age of majority. Earnings may be subject to taxes, and the funds can be used for any purpose once the child assumes control.
- Savings Bonds: Series EE or I savings bonds can be purchased in the child’s name, offering a low-risk investment with tax benefits if used for education.
- High-Yield Savings Accounts: These accounts offer higher interest rates than traditional savings accounts and are a good place for kids to grow funds with easy access.
Can my kids inherit my IRA?
Yes, your children can inherit your IRA. When you designate your children as beneficiaries, they have several options when inheriting the account:
- Inherited IRA: They can transfer the assets into an Inherited IRA, allowing the funds to continue growing tax-deferred.
- Lump-Sum Distribution: They can take a lump-sum distribution, which would be subject to income taxes and could significantly increase their taxable income for the year.
- Five-Year Rule: They can withdraw all assets within five years, with distributions taxed as ordinary income.
Speaking of when you die: The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 introduced changes to the distribution rules for inherited IRAs. Most non-spouse beneficiaries must now withdraw all assets from an inherited IRA within ten years of the account owner’s death, eliminating the option for “stretch” distributions over the beneficiary’s lifetime.
What if my kids don’t want an IRA?
First, who’s the grown-up in this scenario?
Second, who said you have to tell them?
If your precious infant secures a modeling job before her first birthday, that’s an ideal time to squirrel away some of her earnings in an IRA. I have no doubts your financial savvy will impress her when she’s older.
How can I open an IRA for my child?
Opening an IRA for your child is easier than convincing them to clean their room. Here’s how to do it in three steps:
- Find the right provider
Look for financial institutions (like Fidelity, Vanguard, or Charles Schwab) that offer custodial IRAs. Bonus points if they have low fees and user-friendly apps. - Gather your child’s info
You’ll need their Social Security number and proof of earned income (think babysitting gigs or lawn-mowing money). Keep a log if they’re not filing taxes—just in case the IRS gets curious. - Open and fund the account
As the custodian, you’ll manage the account until they hit adulthood (18 or 21, depending on your state). Fund it with their earnings and give them a “match” to sweeten the deal—just stay within the contribution limit (Parents or grandparents can match up to $7,000 or their total earnings, whichever is less).
Voilà! You’ve just set your kid up for a brighter financial future. Now all that’s left is to explain what “compound interest” means without making their eyes glaze over.
In conclusion: Rainy days and IRAs
By understanding the types of IRAs available, contribution limits, potential disadvantages, and alternative investment options, you can help your child get a head start on their long-term financial goals.
Allow me to speak from personal experience one more time. Raising kids to become adults with good financial sense is a multi-year process. It doesn’t happen because of the savings account or the debit card I mentioned at the beginning of this article. It doesn’t happen by giving your kid an allowance and making them save up for something they want. It takes time, effort, and leading by example.
The next time your kids complain of having nothing to do, sit them down and start talking about IRAs. It’ll be fantastic fun! More than anything, I’m sure they’ll appreciate how much you care about securing their financial future.
Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, app, credit card issuer, or any other third-party entity. Article content has not been reviewed, approved, or otherwise endorsed by any such third party. Additionally, FreshBuck strives to provide current, accurate information but makes no warranties regarding the accuracy. Ultimately the reader is responsible for conducting their own research. Additionally, nothing in the article should be construed as financial advice or a solicitation to make a purchase or investment. We strongly advise all readers to solicit their own professional financial advice.
