IRA stands for Individual Retirement Account, and few minors can be expected to think about anything related to retirement when they start earning money. However, a forward-thinking minor can open a Roth IRA because the plans carry no age restrictions. Banks, brokerage firms and insurance companies can help a young person start a tax-friendly Roth. Some offer plans with low minimum initial investment requirements, making it even easier for the young saver to jump start her retirement fund.
You can't open or contribute to a Roth IRA unless you have a taxable income from work. Investment income doesn't count. The amount doesn't need to be significant, and the money doesn't have to be pulled specifically from the taxable income, according to Fairmark. Teens and everyone else aged 49 and under are held to the same contributions limits: they can't put in more than their annual income, or more than $5,000 a year.
A Roth IRA is a more natural fit for minors than a traditional IRA because of the way its tax benefits are designed. A traditional IRA comes with a tax deduction on contributions, but minors aren't likely to take advantage of that since their income isn't that great. A Roth offers tax-free growth and no tax on qualified withdrawals. This focuses the tax benefits on the earnings that accrue over the years.
The earlier you start a Roth IRA, the more time you give it to grow. A Roth IRA propelled by tax-free, compounding growth can turn modest contributions into a large retirement fund. Some providers with accounts designed for minors won't even charge annual fees. It's set up that way so routine costs won't put a dent in a small initial investment.
A guardian must serve as the Roth account custodian until the child turns 18. At that point, the child can get full access to its funds. However, the minor has to understand the money isn't there to spend right now. Withdrawals before the age of 59 1/2 are taxed as ordinary income and will draw a 10-percent tax penalty. A notable exception is the construction or purchase of a first home, an event that triggers an allowance of a $10,000 withdrawal without taxes.
Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.