A Roth individual retirement account (IRA) offers some of the same benefits as a traditional IRA, most notably the tax deferred growth of investments inside the account. But Roth IRAs also have some significant differences, including the way contributions and withdrawals are taxed. Anyone at any age, including minors, can have and contribute to a Roth IRA, provided they had earned compensation during the tax year. Rules involving how withdrawals are taxed are the same for all Roth IRA holders, including minors.
Withdrawal of Contributions
All Roth IRAs, including accounts for minors, must be funded with after tax dollars. The minor cannot take a tax deduction for any contribution she makes to her Roth IRA. She can take withdrawals from her Roth IRA that are equivalent to the total amount of her contributions without initiating a taxable event, since she has already paid taxes on those funds. This is true even if she did not earn enough money during the tax year to require her to file an income tax return.
All funds inside a minor's Roth IRA belong to the minor, even if the trustee requires the parent or legal guardian to open a custodial account on behalf of the minor. The earnings generated by investments in a Roth IRA must remain in the account for at least five years in order to become qualified. Qualified earnings may be withdrawn tax-free from the Roth IRA once the account holder reaches age 59 1/2.
A minor's ability to withdraw funds from her Roth IRA may be limited by the terms established by the account's trustee. Some trustees may require the minor to obtain the permission of a custodian, such as a parent or guardian, prior to withdrawing funds from a Roth IRA. Once the account holder reaches her legal majority she may manage the funds in her Roth IRA as she sees fit, within the parameters established by the account's trustee. She may withdraw any or all of her funds from her Roth IRA. Any withdrawal attributed to her contributions will not result in a taxable event, regardless of her age. Withdrawals of non-qualified earnings will result in a taxable event, regardless of whether the account holder is still a minor, has reached her majority, or is more than 59 1/2 years of age.
Any withdrawal of earnings that have remained in a minor's Roth IRA for less than five years will typically be taxed as ordinary income at the minor's then current tax rate. The non-qualified withdrawal may also be subject to a tax penalty equal to 10 percent of the non-qualified amount withdrawn. The tax penalty may not apply if she used the non-qualified withdrawal to pay for qualified higher education expenses, to purchase a first home, to pay for significant unreimbursed medical expenses, if she became disabled and in certain other situations. If the earnings have been in her Roth IRA for at least five years she may withdraw them tax-free and penalty-free in certain instances, such as to pay for a first home or if she becomes disabled.
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