With summer in full swing and lemonade stand revenue burning a hole in kids’ pockets, can kids fund a Roth IRA instead of just buying more Robux? Yes, kids can use summer jobs to fund a Roth IRA! As long as they have earned income, they are eligible to contribute. This includes income from formal employment or self-employment activities per the IRS. Allowance paid to children doesn’t count, and there are some other gray areas too, so be sure to consult your tax professional if you’re unsure.
Starting a Roth IRA early can be a great way for kids to learn about saving and investing, it allows their money to grow tax-free over time, and it won’t count against their Free Application for Federal Student Aid when preparing to pay for college. Here are some key points to consider:
1. **Earned Income Requirement**: The child must have earned income from a job, such as babysitting, mowing lawns, or selling lemonade. This income can be formal (with a W-2) or informal, but it’s important to keep good records of the earnings. Note that in some cases self-employment taxes (Medicare and Social Security) can apply so it’s advisable to consult with a tax professional.
2. **Custodial Roth IRA**: Since minors cannot open an IRA on their own, a custodial Roth IRA must be set up by an adult. The adult manages the account until the child reaches the age of majority (usually 18 or 21, depending on the state). When the child reaches the legal age in their state, the custodial Roth IRA will need to be converted to a regular Roth IRA in the child’s name.
3. **Contribution Limits**: The maximum contribution to a Roth IRA for 2024 is $7,000 or the total amount of earned income for the year, whichever is less.
4. **Tax Benefits**: Contributions to a Roth IRA are made with after-tax dollars, but the money grows tax-free, and qualified withdrawals in retirement are also tax-free. Distributions before retirement may be taxed and penalized, but there are some helpful exceptions.
Now that you know, you can certainly get your kids out on the street corners selling hotdogs and bottled water, but before you open a custodial Roth IRA it would be prudent to consult with your Francis financial planner. Reach out to us at FrancisWay.com or call 866-232-6457.
