Can a Grandparent Open an IRA for Their Grandchild?

Grandparents can help a child build financial security for the future.
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Not all financial institutions or brokerage firms open IRA accounts for children, but many do. While a parent or legal guardian is usually the person who opens an IRA account for a minor child, a grandparent may set up a Roth IRA for a grandchild. An alternative is to give the child money to fund the account as long as you follow the rules governing IRAs for minors.

Earned Income

A child of any age can own a Roth IRA as long as he earns income from a job. A grandparent can provide the money for a grandchild to contribute to his account, but the amount can’t be more than what the child earns for the year. Nor can the funds a child puts into an IRA come from money invested in the child’s name. An allowance a parent or grandparent pays a child to do household chores does not count as taxable income. In 2011, a child could invest all of his earned income up to a maximum of $5,000.

Age of Majority

While children under the age of majority can work, they can’t legally sign the application to open an IRA account. In most states, the age of majority is 18, but in some states, it’s 21. Although a minor can be the owner of an IRA, an adult must open the account in the child’s name. The adult signing for the account is the person responsible for performing transactions relating to the account. However, the child is entitled to the IRA assets once she reaches the legal age of majority. Even though a grandparent may give a grandchild the money to contribute to an IRA, the money belongs to the child. Once the child is an adult, she can withdraw from the account.

Proof of Income

Although a W-2 form from an employer generally serves as proof of earned income, the money a minor earns from jobs such as baby-sitting, delivering newspapers or doing lawn work qualifies as earned income. Without a W-2 form, a child will need a documented record of his earnings to prove how much income he earned for the year. If the child works in a parent’s business, the IRS will require proof that the child was paid fairly for the work he did. The work the child performs must relate to the business.

Custodial Accounts

When an adult opens an IRA account for a minor child, the account must be in the child’s name as well as the name of the adult custodian whether it be a parent, grandparent or guardian. The adult, as the custodian, is the co-applicant. Since the child is actually the applicant, you must use her tax I.D. number on the account. Normally, only one custodian is allowed on the account.

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