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Hiring Your Children; Maxing Out a Roth IRA for Kids Thumbnail

Hiring Your Children; Maxing Out a Roth IRA for Kids

Roth IRAs are an attractive method for retirement saving for adults, but did you know kids can have Roth IRAs too?

A Roth IRA for kids is just like a regular Roth IRA, with similar contribution limits, tax laws, and penalties.

Here's everything you should know.

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What Is a Roth IRA for Kids?

Custodial Roth IRAs are similar to a Roth IRA you might hold, but kids are the account holders. The power of compound interest can help your child increase their retirement savings early by socking away after-tax dollars earned at a young age.

A minor or custodial Roth IRA has similar rules as a traditional Roth IRA, but there are some differences.

Custodial Roth IRA Rules

The most critical Roth IRA rule is that a kid's contribution can only come from earned or taxable income. The income can be from any source, such as babysitting or working for a company. However, the child's earnings may not be from allowance or investment income, and your child must pay income tax for it to count for IRA contributions.

All contributions kids make to a Roth IRA are after-tax. This means they can contribute their net income. Kids must report their income on their income tax return and pay the appropriate tax liability.

Ideally, if kids leave contributions and earnings and enjoy tax-free growth, they can enjoy a tax and penalty-free withdrawal during retirement because the contributions are after tax. However, they can make penalty-free withdrawals of the contributions, should they need them before retirement. If kids withdraw earnings before retirement, they may pay taxes and a penalty.

Benefits of a Roth IRA for Kids

A child's Roth IRA has many benefits, including the following:

  1. Teach good financial habits - Kids learn by doing, and helping them save for retirement early can set positive financial habits. Teaching kids to save a portion of their earned income early makes it natural for them to continue in adulthood and enhances their financial literacy.
  2. Extended time for compound earnings - The earlier kids contribute to a Roth IRA, the more money they'll make. For example, if a child contributes to an IRA at age 13 and retires at 65, that's 52 years of compounded earnings if they don't withdraw money early.
  3. Can withdraw money early - There isn't a penalty for withdrawing funds if they withdraw only the contributions. A Roth IRA can be a safe place for money to pay for college expenses, a down payment on a house, or other significant costs.

Related Article | What Is a Minor Roth IRA? Can I Contribute Funds for My Child?

Roth IRA for Kids- Maximum Contributions

Like adult Roth IRA contributions, there are annual maximum contribution limits for Roth IRAs for kids. The maximum Roth IRA contribution is the same as adults, which in 2023 is $6,500 per year. However, kids can only contribute the lesser of their total earnings, or $6,500.

For example, if your daughter earned $2,000 this year, her maximum contribution is $2,000. But, if she made $10,000, she could contribute a maximum of $6,500 to her retirement account.

There are also rules regarding how children can earn income for a Roth IRA for kids. While allowance technically isn't allowed, parents can pay kids for tasks at the market rate, which they can use for retirement savings. However, to ensure the funds are permitted, it's best if kids do the work for others outside the family, too, such as cutting lawns or babysitting.

Example 1

You can employ your children, paying them the market rate for specific services, and it can count towards the maximum annual contributions for Roth IRAs for kids.

For example, you have three kids, one old enough to babysit. You and your spouse go on a date night and pay your child for four hours of babysitting at the area's average rate of $12/hour. Your child also babysits for a couple of neighbors and, throughout the year, makes $5,000 from all sources.

If your child files an income tax return for the $5,000 earned, they can contribute up to $5,000 in their Roth IRA since it's below the $6,500 threshold.

Example 2

In this example, we'll say your child started a business mowing lawns. He advertised his services to the neighborhood and picked up steady work, allowing him to make $10,000 this year.

If your child files a tax return showing the earned income, he can contribute money to a custodial Roth IRA. However, he cannot contribute the entire $10,000 because of the contribution limits.

Your child can contribute up to $6,500 in a Roth IRA, but let's say you want him to be able to save it for a car or even spend his earnings. You can make contributions to a Roth IRA for your child, but only up to the limits. In this case, you could contribute up to $6,500 since your child made $10,000.

If your child made $3,000, the maximum you could contribute to a Roth IRA for him is $3,000.

Related Article | What Is The Difference Between A 401K And An IRA?

Child Labor Laws

The law governs what age kids can work, the scope of work they can perform, and when they can work, affecting their contributions to retirement accounts.


The Fair Labor Standards Act created four tiers based on a child's age. These laws apply to all non-farm work.

Under age 14

In general, children under the age of 14 cannot work. But a few exceptions exist, including running a paper route or the occasional babysitting job, or working as an actor/model.

Ages 14 and 15

Children between the ages of 14 and 15 can work, but only limited hours per day and week, and certain types of jobs. The hours children can work depends on whether it's schooltime or summer.

Ages 16 and 17

At ages 16 and 17, kids can work where they want, and however much they want. However, they cannot work in any jobs considered dangerous.

Age 18

Kids ages 18 and older are treated as adults and don't have any restrictions regarding where they can work or how much.

Parent-Owned Business Exemptions

If you own a business, you may employ your child with few restrictions. There aren't limits on the hours or days worked or even the amount of time kids work for you. However, if your business falls under "hazardous" categories, such as manufacturing or mining, children cannot work there.

Local vs. State Laws

Some local and state laws have more restrictions than federal laws. If your locality or state has stricter guidelines, you must follow those guidelines, not federal ones.

Considerations Before Hiring Your Child

Before hiring your child to work for your business, consider these factors.

Consider How Wages May Affect Financial Aid 

Passing income from your business to your child can be a great way to decrease your tax liability and help your child, but it may hurt your chances of securing financial aid for college for qualified educational expenses.

The Free Application for Federal Student Aid evaluates the parent's and child's earned income. The Department of Education counts 50% of the child's income toward the family's expected contribution and 47% of the parent's income. However, kids can protect the first $6,700 earned, which can be beneficial.

Must Hold a Legitimate Position

You can't make up a position and pay your child for it. The job they hold must be legitimate and standard for the industry. The job could be as simple as cleaning or filing, but there must be something honest they can do that's age-appropriate.

Must Pay Realistic Wages

The wages you pay your child must be realistic for the job/industry. The Internal Revenue Service will likely catch it if you overpay your child. For example, paying a child $50/hour to file isn't realistic, but if you have a high school-aged child majoring in marketing and you hire him to do your social media, $50 an hour isn't unrealistic.

Impacts on Dependent Status 

Be careful that the salary you pay your child doesn't make them 'independent.' Even though they live with you, if their income exceeds 50% of their required support, the IRS may not allow you to claim them as a dependent.

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Do Chores Completed at Home Count Towards Earned Income?

Chores and allowance don't count toward earned income, but parents can get around it by 'hiring' their child to babysit or cut the lawn. To prevent it from looking like allowance, it's beneficial if kids do the same tasks for others for pay.

Do I Need to Provide Proof of Income for My Child's Custodial Roth IRA?

Records are always great for the IRS, but if your child has self-employment income, keep records of when they earned the income, who paid it, and the services rendered.

Does a Child Have to Be Employed by a Parent to Contribute to a Roth IRA for Kids?

No, a child can work for anyone, including a company, to contribute to a Roth IRA for kids.

Is a Minor's Earned Income Subject to Income Tax?

Minors must file income taxes and claim their earned income; however, they have a much higher threshold that allows them to pay 0% taxes. In 2023, that amount is $13,850.

The Bottom Line

Custodial Roth IRAs are an excellent way for kids to save for their future. Ideally, a Roth IRA for kids would be a retirement savings vehicle, but kids can use the funds for most purposes, as long as they only withdraw contributions, not earnings, before retirement age.