A minor may have an individual retirement account (IRA) as long as he has earned income, although an adult guardian of the account is named until the account owner turns 18. Minors may open either traditional or Roth IRAs. Unlike with traditional IRAs, there are no mandatory Roth IRA withdrawals.
A minor may contribute up to $5,000 annually to the Roth IRA, as long as the child earned at least that much in income. If the child earned less than that amount, he may contribute up to 100 percent of his earnings. Unlike a traditional IRA, Roth IRA contributions are made with post-tax dollars. While Roth IRA contributions are not deductible on federal income tax returns, withdrawals are tax-free. Except in certain circumstances, the minor cannot withdraw assets from the Roth IRA without penalty until reaching the age of 59 1/2.
Opening the Roth IRA for A Minor
A Roth IRA account for a minor must be opened at the financial institution by an adult, and held in the minor's name as the guardian. Although the adult is the only individual who may make transactions, for income tax purposes the account is registered to the minor. Contributions to the minor's Roth IRA held by the adult guardian do not effect the adult's ability to contribute to an IRA registered in her own name.
Not everyone is eligible to open a Roth IRA. Unlike traditional IRAs, which do not impose income limitations even if contributions above a certain adjusted gross income (AGI) are not deductible, Roth IRA contributors must meet specified AGIs to make contributions. As of the time of publication, a single filer may make a full Roth IRA contribution if the AGI is less than $107,000. Between $107,000 and $122,000, a partial contribution may be made, but taxpayers with an AGI over $122,000 are ineligible. While these income limits do not affect most minors, some children may earn substantial incomes and the AGI must be taken into consideration by the adult guardian.
Early Withdrawal Penalties
The Internal Revenue Service (IRS) imposes a 10 percent tax on Roth IRA withdrawals made before the age of 59 1/2, along with an ordinary income tax on any earnings. There are exceptions to this regulation, which may be of special interest to a young person. Penalties are waived for first-time home buyers withdrawing up to $10,000, if payments are made for financing, closing and settlement costs. Exceptions are also made for withdrawals made to pay for higher education.
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