Kiddie Roth IRA – Teach Better Money Habits

Certified Financial Planner®

By K. Bridget Schneider, CFP®, CRPC®

kiddie roth IRA

Do your children or grandchildren have earned income?  Opening a Kiddie Roth IRA can be a valuable tool for teaching them better money habits.  It may also be an opportunity to help them begin a powerful savings plan for retirement.  If certain rules are met the money can be withdrawn tax-free when they retire. 

Do you wish you had started saving for retirement or been shown better money habits at an early age?   Many overlook this option for children because they think there are age limits that prohibit contribution for minors.  In fact, an individual may contribute the lesser of his or her earned income or $6,000 for the 2019 tax year. 

Earned income is any taxable income received by the child, including W-2 wages or self-employment income from mowing lawns or babysitting.  So, if a minor child had a summer or part-time job that generated taxable income, that child is eligible to open and contribute to a Kiddie Roth IRA.    

Establishing the Kiddie Roth IRA

The Kiddie Roth IRA is for children under the age of 18.  It is established by a child’s parent (or grandparent) as a custodial account with the adult acting as custodian and the minor as the account holder.  If the child has earned income, it doesn’t matter where the contributed funds come from.  So, your gift to fund the account could be an opportunity to help your child or grandchild start on the right foot financially.  Just remember that once the child is no longer a minor, the funds become his or hers to control.

More Time Means More Growth

Most of us have 30 or 40 years until retirement once we start investing.  A child who gets started earlier has the benefit of more time.  If a child leaves their money in the Roth IRA until retirement, they could be looking at 50 or more years of investment growth, completely tax-free.  For example, a one-time contribution of $6,000 in a Roth IRA, even with no additional contributions, would grow to almost $200,000 in 50 years (assuming a 7% annual return and monthly compounding including dividends reinvested).

Investing vs. Saving

Of course, that type of growth doesn’t happen in an ordinary savings account, which is the more traditional choice for kids because it’s flexible and doesn’t require earned income.  However, a Roth IRA allows your kids to pick and choose investments, which, over the long term, can lead to the kind of growth described above.  Although it is possible to lose the money invested in their Roth IRA depending on their choices, history shows that is unlikely to happen if they stick to a diversified portfolio over a long timespan.

Additional Advantages

A Roth IRA has several features that make them advantageous for kids throughout their lifetimes.  In addition to providing a good start on future savings habits and tax-free withdrawals in retirement, those funds may also have some uses at other times in their lives. 

The rules for Roth IRAs provide some flexibility to withdraw funds before retirement. Because Roth IRAs are funded with after-tax dollars, the contributions can be withdrawn at any time, for any reason, without being subject to the penalty for early withdrawal.  Please note this only applies to the money contributed to the account.  Any earnings withdrawn from the account may incur a 10% early withdrawal penalty and the amount withdrawn may be subject to income taxes as well.

However, if those earnings distributions are used for their qualified educational expenses such as college, there is an exception to the early withdrawal penalty.  Earnings from the account can be withdrawn and will be taxed, but there is no 10% penalty. 

Five years after the initial funding year, the child can also withdraw up to $10,000 in earnings from the account tax and penalty-free to buy their first home.  This can go a long way towards giving your child or grandchild the ability to purchase their own home.


Now you see how a Kiddie Roth IRA may be an attractive option if you’re looking to help children or grandchildren save for college, a first home purchase, or even their eventual retirement.  When the account is properly funded and maintained, the value of the compounded growth can provide a powerful tool to jumpstart the younger generation’s savings potential.  What a wonderful way to teach better money habits! 

Some of you may find value in talking with a Financial Advisor or Certified Financial Planner™ professional.  If you would like help with investing or have financial planning questions that need answers, then be sure to visit our website today or call us at 217-605-8130.  Our goal to help you make more informed financial decisions.  As your friendly financial guide and ally, we can help you create a budget, develop a financial plan, review your investment strategy, or structure an estate plan that makes sense for your unique situation. 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice.  The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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