A Roth individual retirement account is treated like a traditional individual retirement account for income tax purposes, with some notable exceptions. Contributions to a Roth IRA are not deductible when you file your federal income tax return. If you meet certain qualifications, withdrawals from your Roth IRA are free from federal income taxes. There are no age limits on a Roth IRA, so you can contribute toward a minor's Roth IRA, provided you observe certain requirements.
No one is too young to have a Roth individual retirement account. Unlike most investment accounts, anyone, including minors, can have a Roth IRA. The only stipulation is that the individual must have earned compensation. The Internal Revenue Service (IRS) considers earned compensation to be income from working, including income from employment or self-employment.
You can only fund a Roth IRA with taxable earned income dollars. This means the minor must have earned income in her own name. This income cannot be investment income, such as dividends or interest income. This income cannot be in the form of an allowance from parents for doing household chores, but it can include pay from babysitting or mowing the neighbor's lawn. An amount equal to 100 percent of the taxable income earned by a minor child, up to a maximum of $5,000 as of the time of publication, can be contributed into the child's Roth IRA.
Roth IRA Gift
There is no requirement that the same dollars the minor child earned be used to fund her Roth IRA. The only stipulation is that the minor child must have taxable earned income and that the contribution to her Roth IRA cannot exceed the amount of that income or $5,000, whichever is less. The minor child may spend her earnings any way she likes, and you can still contribute an amount equal to the maximum allowed by current tax regulation to her Roth IRA as a gift.
There is no tax deduction for contributions to a Roth IRA. The minor child cannot take a tax deduction when she files her federal income tax return, and you cannot take a deduction for contributing to her Roth IRA. The funds in the minor child's Roth IRA are allowed to grow tax deferred for as long as they remain in the Roth account. Keep in mind that the child's Roth IRA belongs to her. Once you have made a contribution into her Roth IRA you no longer have control over what she does with those funds.
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