A Roth IRA for a toddler?
Scrolling through my email on a rainy June day, I came across this gem of a question from a reader about Roth IRAs for kids.
The reader wanted to know what kind of jobs can a 3-year-old do that would qualify as earned income to open a Roth IRA?
Before red flags are raised, just a reminder that, yes, children can open Roth retirement accounts — in fact, it’s a great idea because the money can grow untouched for 50 years or so until needed. There is no age requirement, only an earned income requirement that would be reported on a federal tax return.
Earned income for kids typically comes from sources such as working at a fast-food restaurant, spending the summer as a lifeguard, sacking groceries, or even filing and shredding papers at the family business.
Earnings from babysitting or mowing lawns count, too, as long as you document the cash payments. In that regard, I always marked mowing and babysitting paydays on a calendar when my kids were hustling for those jobs.
But earned income for a child still in daycare?
What the reader had in mind were tasks their child was already doing. They included feeding the dog twice a day, clearing dishes from the table, loading and unloading the dishwasher, and emptying the trash baskets around the house. A pretty remarkable 3-year-old, I’d say.
While those sound more like household chores that are tied to a normal allowance, it’s hard to predict how the Internal Revenue Service would respond if it launched an audit, said Andy Rosen (no relation), an investing analyst at NerdWallet.
Rosen notes there are some jobs a 3-year-old could do. For example, kids under 14 are allowed to work for a business owned by their parents, unless it involves hazardous work. A child can also work on small farms with parental consent, or farms owned by their parents.
Preschoolers can also contribute to a Roth if paid for acting or modeling.
One other job option listed by the U.S. Department of Labor for children is “gathering evergreens and making evergreen wreaths.” So if you live near a pine forest, Rosen said, it’s your lucky day.
Rosen recommends checking with your state’s labor department to make sure there aren’t additional restrictions.
Ted Rossman, an analyst at Bankrate. com, said he also believes payments for normal household chores would be a tougher sell in qualifying a very young child for a Roth IRA.
“In almost all cases,” Rossman said, “I don’t think this one is going to pass the sniff test … 3 years old sounds like a massive stretch.”
All this aside, it’s still a great idea to open a Roth IRA if your child is eligible because they could enjoy decades of tax-free growth. Children who are considered minors — in most states under 18 — would require an adult to open a custodial account on their behalf.