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Financial Planning > Tax Planning

Skip the Cash Gift, Try a Kiddie Roth IRA for the Holidays

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With the kickoff to the holiday giving season upon us, many clients may be wondering how they can use this opportunity to give a gift that helps children and grandchildren start out on the right foot financially.

While savings bonds, Section 529 plan contributions and outright cash gifts are popular options, one often-overlooked tool for helping the younger generation begin their savings program is the Roth IRA. For clients looking for a flexible, tax-preferred option for helping their children or grandchildren begin to save for the future, the Kiddie Roth IRA can offer both flexibility and a powerful option for tax-free growth because of the significant amount of time that the funds could potentially be left to grow. Despite this, understanding the IRS rules for when and how these accounts can be established is key to maintaining the tax benefits of a Roth IRA for younger generations this holiday season.

Basics for Establishing the Kiddie Roth IRA

Many clients overlook the Kiddie Roth IRA option for minor children because they believe there are age limits that prohibit contributions for minors—in fact, until an individual reaches age 70½, the only restriction on funding even a traditional IRA is that the individual have earned income for the year. In 2019, an individual may contribute the lesser of (1) his or her earned income for the year or (2) $6,000.

Therefore, if a minor child had a summer or part-time job that generates earned income, that child is eligible to open and contribute to a Kiddie Roth IRA. The Kiddie Roth IRA is technically established by a minor child’s parent (or grandparent) as a custodial account, with the adult acting as custodian and the minor as the account holder—once the funds are transferred into the child’s account, the transfer is irrevocable (i.e., the funds cannot later be transferred into an account for another individual). Once the child is no longer a minor, the funds become his or hers to control.

As long as the child has earned income, it doesn’t matter where the funds that are actually contributed to the account come from—meaning that if the child earned $6,000 in 2019, a parent or grandparent can fund the Kiddie Roth IRA for that child with $6,000 of the adult’s own money, allowing the child to keep his or her income.  Earned income is any taxable income earned by the child, including traditional W-2 wages from a summer job or even self-employment income earned mowing lawns or babysitting.

For self-employed clients, hiring the minor child to work in the family business can produce an additional tax benefit because the parent-employers can deduct the child’s earnings as business expenses. However, if the business is organized as a corporation, the child’s wages will be subject to FICA and FUTA withholding even if the child is under age 18 (for sole proprietorships, husband-wife partnerships and certain LLCs taxed as proprietorships or husband-wife partnerships, the wages of the minor will be exempt from FICA and FUTA).

Know Before You Go: What to Expect From the Kiddie Roth IRA

In general, Roth IRA contributions can be withdrawn at any time—i.e., the child is not subject to the harsh penalty taxes that apply to early withdrawals from traditional IRAs and 401(k)s, because the account is funded with after-tax dollars. Despite this general rule, a ten percent penalty tax will apply to any Roth IRA earnings that are withdrawn within the first five years after the Kiddie Roth IRA is established, or that are withdrawn before the child has reached age 59½, died, or become disabled.

The penalty tax (as well as typical income taxes) on Kiddie Roth IRA earnings up to $10,000 can also be avoided if the account owner uses the funds to purchase his or her first home.  The penalty on earnings is avoided if the funds are withdrawn to pay for qualified education expenses (also the earnings withdrawn will be subject to traditional income tax).

Importantly, the actual funds that were contributed are not subject to the penalty or taxes upon withdrawal for any reason, and withdrawals from Roth IRAs are treated as first coming from the actual contributions.


The Kiddie Roth IRA can provide an attractive option for clients looking to help children and grandchildren save for college, a first home purchase or even their eventual retirement this holiday season. When the account is properly funded and maintained, the value of the account’s compounded growth–potentially over decades–can provide a powerful tool to jumpstart the younger generation’s savings potential.


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