With few exceptions, a person may only have an individual retirement account -- whether it is a traditional IRA or a Roth -- if he has earned income. You are free to open and fund an IRA for your child, but you may contribute to the account in any year no more than he has earned during that year. You must also respect the current yearly IRA limit.
The Internal Revenue Service demands that IRAs be funded with earned income. Its definition of earned income includes salaries, wages, tips, commissions and self-employment income. Alimony and separate maintenance payments are also included. However, investment income cannot be contributed to an IRA.
IRA Yearly Contribution Limit
The IRS stipulates IRA contribution limits. As of 2012, the annual limit for people under the age of 50 is $5,000. If you open more than one IRA for your child, the total contributions to them may not exceed $5,000. For example, if your child has enough income, you may put $2,500 in one account and $2,500 in another. You may not put $5,000 in each of two IRAs.
Opening an Account
Not all banks, brokerages and savings and loans will open IRAs for children. Larger institutions, however, are good bets. You must be the parent or legal guardian of a child to open an IRA for him. To open an account, you must provide your own name, address and contact information, as well as the name, date of birth and Social Security number of the child. You'll also have to provide the name, date of birth and Social Security number for at least one beneficiary.
Source of the Funds
You can contribute the money to your child's IRA from your own income. So if your child spends her earnings or puts them in a savings account, you can put money in the IRA for her, as long as the amount does not exceed what she has earned.
Keep records of the jobs by which your child earns income and when and how much he is paid. Safeguard any Form W-2 or Form 1099 he receives at the start of the tax year. If the IRS ever questions his IRA eligibility, a detailed log of work and payments will come in handy.
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