Grandparents often want to help teach their grandchildren the value of saving for the future. Because of the tax-sheltered growth and future tax-free qualified distributions they offer, Roth individual retirement accounts are popular choices for the purpose. Some financial institutions allow grandparents to open a custodial Roth IRA for a grandchild under age 18. However, just because the account can be opened by grandparents doesn't mean they can make contributions to it.
Custodial IRA Accounts
Grandparents can open a custodial Roth IRA at financial institutions that offer them. With a custodial Roth IRA, the grandparents maintain control of the account until the child turns either 18 or 21, depending on the state. After the grandchild reaches the specified age, she can use it however she wishes. However, once money is in the account, the custodian can't take it back. The application requires the name, address and Social Security number for both the grandchild and the grandparent who will act as custodian.
Age and Income Limits
Roth IRAs don't have a minimum age for contributions, so a child of any age can contribute. As for income, if a grandchild's modified adjusted gross income exceeds the annual limits, the grandchild can't contribute. However, this is highly unlikely, given that as of 2012, the limit for singles is $110,000 before the contribution limit starts phasing out.
The grandchild must have compensation during the year to make a contribution to a Roth IRA. Compensation includes hourly wages, salary and self-employment income. For example, the grandchild might have compensation from a summer job or babysitting. If the grandchild doesn't have any compensation, no contribution can be made. Gifts, savings and investment income doesn't count as compensation. In addition, compensation isn't transferable, so the grandparents can't designate some of their compensation to count for the grandchild.
As of 2012, for anyone under 50 the maximum contribution is $5,000. So, if the grandchild has $5,000 or more in compensation for the year, a full $5,000 contribution is allowed. However, if the grandchild has less than $5,000 in compensation, the amount of compensation is the annual contribution limit. For example, if the grandchild only earns $1,000 from a summer job, the grandchild cannot contribute more than $1,000 to the Roth IRA.
If the child does have compensation, the grandparents can gift money to the grandchild to be put in the Roth IRA. The IRS doesn't require that the specific dollars of compensation be used for the Roth IRA contribution, just that the contributor have compensation. For example, say the grandchild earns $4,000 from babysitting, but uses that $4,000 to purchase a new car. If the grandparents gift $4,000 to the grandchild, that money can be used to contribute to the grandchild's Roth IRA.
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