Kid Roth

Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Colorado is representative of a common question on whether children can have Roth IRAs and who can fund them.

"My client claims he heard parents and grandparents can now fund Roth IRAs for children/grandchildren. He wants to set up Roth IRAs for several minor children—is this permissible."

Highlights of the discussion

The issue of establishing and funding Roth IRAs centers on earned income (IRC §408A)—not age. An individual of any age with earned income up to a certain level can fund a Roth IRA. Earned income is defined as wages or self-employment income from services performed. If the child does not have earned income, they cannot fund a ROTH IRA.

Thus, a minor with earned income (e.g., from a lemonade stand) could fund a Roth IRA. One hurdle, however, is setting up the account. Most states do not allow minors to enter into contracts. Therefore, a parent or legal guardian would need to sign opening documents to establish the Roth IRA on behalf of the child.

It could be your client heard about a proposal coming out of Washington that, if passed by Congress and signed by the president, would allow family members to fund Roth-like accounts for minors (i.e., “Trump Accounts”). This is just a proposal, and the fate of that provision is unknown at this time.

Conclusion

An individual of any age with earned income up to a certain level can fund a Roth IRA. For minors, however, most states do not allow them to sign contracts. Therefore, a parent or legal guardian would most likely need to establish the account.