Roth IRAs for Children

I was thinking about starting a Roth IRA for my young son. However, I was wondering if there are any restrictions, such as whether he has to earn the money.

That's a great idea. Investing in a Roth IRA for your child is an excellent way to give him a huge head start on saving for the future. But there's one big catch: The child needs to have earned income -- even if it's just from delivering newspapers, babysitting or mowing lawns (but not just from their regular allowance).

If your child is too young to earn money -- and hasn't started a career as a baby model -- then you'll need to find some other ways to save for now. Check out our ABCs of Saving for College for other savings ideas for young children.

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But as soon as your son does earn money, opening a Roth IRA for him can be a very powerful way to save. He'll be able to invest the amount of his earned income, up to $4,000 in 2006, just like anyone else (the maximum increases every few years).

Make sure your child keeps records that list the date of each job, the person who paid him and how much he earned -- then keep the records in your tax files, just in case the IRS ever has questions.

He doesn't need to invest the actual money that he's earned himself -- most 12-year-olds would have a tough time understanding why everything they earned had to be set aside for the future. As long as he has a job, you can give him some money to invest in the account, as long as it doesn't exceed the limit.

Even investing just a little money in the account when he's young can make a big difference in the future. If you invest $2,000 when he's 12 in a Roth IRA and the investments earn 8% per year, that one contribution will grow to more than $$138,000 by the time he's 67 years old. Continue to invest just that much every year, and his account will grow to more than $1.8 million by retirement. Invest the maximum, now $4,000, and he'll have more than $3.6 million -- tax-free. What a great path to start your kid on.

Some IRA administrators give parents a tough time, though, when they try to open an IRA for their kids because minors can't legally enter into binding contracts. But most fund companies and brokerage firms just require an adult to co-sign the paperwork. Charles Schwab, Merrill Lynch, T.D. Waterhouse, Vanguard, T. Rowe Price, Dodge & Cox and Oakmark, for example, all allow kids to open Roth IRAs. For more information, see Roth IRA Rules for Kids. For investing ideas for very long-term savings, see our Kiplinger's fund portfolios.