How to Open a Custodial Roth IRA

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Contributor, Benzinga
April 7, 2022

If you’re like most people, you probably don’t often worry about your little kids and the concept of saving for their retirement at the same time. However, opening a retirement savings account for a child isn’t impossible — and it’s not as crazy an idea as it might sound. Acting as a custodian on a Roth IRA for your child can help them begin working towards a financial cushion that can be invaluable as an adult.

Step 1: Gather Important Documents

When you create an IRA account for your child, you’ll be the custodian on the account until the child turns 18 (or 21 in some states). You’ll need to provide personal information for both you and your child before you can set up an account and begin investing. Some of the information you’ll need to get started will likely include:

  • Both you and your child’s dates of birth
  • Both you and your child’s Social Security numbers
  • Your address
  • You and your child’s full legal names
  • Your banking information to make contributions to the account

You may need additional information depending on the brokerage where you’re opening the account.  

Step 2: Choose a Custodial Roth IRA Provider

After you’ve gathered all the personal documentation that you’ll need to open the account, you’ll would select a broker that you’ll use to invest through. Though most brokers will allow you to open a Roth IRA or traditional IRA for yourself, not every broker allows a custodian to open an IRA for kids.

Before you begin the account creation process, you’ll want to be sure that the broker you’re working with offers custodial accounts. Later in this article, you’ll see a table of a few reputable providers currently offering custodial IRA accounts. 

Step 3: Open the Custodial Account 

After you know where you’d like to open an account, contact your brokerage to learn more about how to get your child set up. If you’re working with a broker that specializes in custodial accounts, your child may be able to open an account with a lower minimum than what’s required when opening an account for an individual adult. However, these minimums vary by broker. Speak with a representative from your company of choice to learn more about the specific steps you’ll need to go through when opening an account and the minimum deposit required when getting started. 

Step 4: Talk to Your Child About Contributions

After you finalize the Roth IRA account, sit down with your child and explain what it means to save a portion of the money they earn. Remember that to qualify for a contribution to a custodial Roth IRA, your child needs to earn some form of income. Teaching your child about all of the benefits that come with investing for kids can help them be more excited about contributing a portion of the money that they earn to their investing account.

Get your child as involved with their investing journey as possible early to help foster responsible money management. If your child has a part-time job, talk about what they’re already paying in taxes and decide what percentage of their income is reasonable to save from each paycheck. If your child is too young to be employed, agree on a list of chores and a set rate that your child will earn when they complete them each week.

As the adult on the account, you’ll have the final say on investment contributions made until your child takes control of the investments. However, helping your child get involved as much as possible in the asset selection in the account can help motivate them to save and earn even more. You can also motivate your child to put more money into their IRA account by offering to contribute a percentage of any contributions your child makes in the form of a gift. For example, if your child earns $2,000 working over the summer, you might incentivize them to put $1,000 into their IRA by offering to contribute your own $1,000 as a gift in addition to that money. 

Advantages of a Roth IRA

A Roth IRA is only one of many types of retirement accounts that you’re able to invest in with tax advantages. What sets a Roth IRA apart from other types of retirement savings accounts — like a 401(k) account or a Health Savings Account (HSA)? Some of the most important benefits of a Roth IRA include the following.

Tax-free growth: Tax-free growth is the primary benefit of opening a Roth IRA over a traditional IRA. When you contribute money to a Roth IRA, you do so with after-tax dollars. While this means that you won’t be able to claim a tax deduction on your contributions the year that you make them, you also won’t need to pay taxes on any increases in value you see within the account.

When you reach retirement age, you can also take withdrawals from the account tax-free. This benefit can be an ideal setup for younger investors in particular because teenagers and young adults will usually pay a lower tax percentage on their income now when compared to the end of their careers.

Withdraw contributions at any time: After you contribute to most types of retirement investing accounts, you’ll be penalized if you withdraw any money before you reach retirement. This is not the case with a Roth IRA — you may withdraw contributions without paying taxes or penalties at any time. While you’ll be subject to taxes on any withdrawal of earnings you make before you can make a qualified withdrawal, Roth IRAs can provide you with an option to access your investment contributions in the event of an emergency without worrying about fees.

This feature can be another great benefit that comes with opening a Roth IRA when your child is younger. As they enter the early stages of their adult life, your child may need money for things like emergencies, college tuition or a deposit on their first apartment. A Roth IRA essentially helps your child begin creating an adult emergency fund they can tap into penalty-free later down the line.

There are no age stipulations on Roth IRAs: As long as you have taxable income, you can make contributions to a Roth IRA account. This doesn’t only mean that your child can begin investing with money from their part-time job — it also means that they can also continue investing throughout their life without worrying about the age limitations present on some retirement accounts. 

Advantages of Investing for Kids

Investing as early as possible is a smart way to teach your child about the power of money management. Some of the benefits that come with helping your child to learn how to invest include the following.

More time to grow: When your child begins investing early, dividends and interest earned on investments have more time to grow. Investing just a few dollars a month when your child is young can mean thousands of extra dollars years later.

Helps your child learn about saving money: Unfortunately, many adults don’t fully realize how important investing is until they’re beginning to think about retiring. Teaching your children all about the benefits that come with setting just a little money aside each month can help them save more as they grow up. 

Compare Custodial Roth IRA Account Providers

Ready to begin investing for the future with a custodial Roth IRA? Benzinga offers insights and reviews on the following custodial Roth IRA providers. You may want to consider beginning your search for the right brokerage using the links below. 

Frequently Asked Questions

Q

At what age can you open a custodial Roth IRA?

A

As long as you are over the age of 18 (21 in some states), you can open a custodial account for a child under your care. Keep in mind that your child must have some form of taxable, earned income in order to qualify to make any type of contributions to their IRA.  

Q

Can I open a custodial Roth IRA for my baby?

A

You can open an IRA for a child of any age. However, your child cannot contribute money to the IRA unless they have some form of income. This income does not have to be from a W-2 job — you can pay your child for babysitting or chores done around the home and contribute that as the child’s income. 

Keep in mind that the child needs to do some form of legitimate chores or housework in exchange for payment (you cannot contribute a child’s allowance that they do not earn) and the money earned needs to be at a reasonable market rate. For example, you cannot pay your child $1,000 a week to take out the trash. 

About Sarah Horvath

Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.