| Roth IRA Contribution Limits 2023 | ||
|---|---|---|
| Filing Status | MAGI | Allowable Contribution |
| Married filing jointly or qualifying widow(er) | Less than $218,000 | Up to the limit |
| Married filing jointly or qualifying widow(er) | At least $218,000 but less than $228,000 | A reduced amount |
| Married filing jointly or qualifying widow(er) | $228,000 or higher | Zero |
| Married filing separately and you lived with your spouse at any time during the year | Less than $10,000 | A reduced amount |
| Married filing separately and you lived with your spouse at any time during the year | $10,000 or higher | Zero |
| Single, head of household, or married filing separately and you did not live with your spouse at any time during the year | Less than $138,000 | Up to the limit |
| Single, head of household, or married filing separately and you did not live with your spouse at any time during the year | At least $138,000 but less than $153,000 | A reduced amount |
| Single, head of household, or married filing separately and you did not live with your spouse at any time during the year | $153,000 or higher | Zero |
Source: Internal Revenue Service
You can contribute to a Roth IRA even if you already have a retirement plan at work, as long as you’re within the income guidelines.
Opening a Roth IRA for a Child
It’s possible to open a Roth IRA on behalf of a child only if that child has earned income.You would need to set up a custodial account, which you can do through a brokerage. Custodial accounts—which also can be used to save for education expenses for kids—are controlled and managed by an adult for a minor child. Once the child reaches adulthood, the assets in the account become theirs.
Opening a custodial IRA for a minor child isn’t that different from opening an IRA for yourself. The main steps include:
- Choosing a brokerage
- Completing the application for a custodial IRA
- Linking an external bank account for funding
You’ll need to share your personal details, including your name, date of birth, and Social Security number. The brokerage will need the same information for your child.
A custodial Roth IRA for a minor child follows the same rules for contributions as a noncustodial IRA. The maximum contribution allowed must be the lesser of $6,000 for 2022 ($6,500 for 2023) or their total earned income for the year.
For an adult, the lesser-amount restriction rarely comes into play. For a kid, of course, it often does. For example, if your child earns $3,000 in one year from mowing lawns or babysitting, then the most that they could contribute to a custodial Roth IRA is $3,000. You can’t put in another $3,000 of your own money to reach the $6,000 limit.
However, the IRS won’t know where the cash actually came from. Theoretically, if your child has earned $3,000, you could contribute $3,000 on their behalf—or match what they contribute, up to $3,000. This is a good way to introduce the concept of matching funds—which your child will, you hope, encounter later in the workplace with an employee 401(k).
It may be helpful to discuss tax filing with a tax expert if your child has higher earned income or money earned from self-employment.
Benefits of Opening an IRA for a Child
There are some good reasons to consider opening an IRA for a child if they’re already earning money. One of the most obvious advantages is that time is on their side when it comes to saving. The more time their money has to grow, the more they can capitalize on the benefits of compounding interest. As they’re adding money to a Roth IRA instead of a traditional IRA, kids also get the benefit of tax-free distributions later when they’re ready to use that money for retirement.
Using an investment calculator can be a helpful way to drive home the difference between saving money and investing it.
Roth IRAs offer flexibility, as original contributions can be withdrawn without triggering a tax penalty. Funds withdrawn from original contributions can be used for any purpose. For example, your teen might take $4,000 from their Roth IRA to buy a used car. Once the account has been open for five years, your child can take out up to $10,000—without penalty and tax free—toward the purchase of a first home.
Opening a Roth IRA can also be a good way to introduce kids to the difference between saving and investing, and to instruct them on how the stock market functions. You can sit down with kids to review their investment options and explain how stocks, mutual funds, and bonds work. This can also be a good opportunity to illustrate the power of investing versus saving in terms of the potential returns earned over time.
Can I Open a Roth Individual Retirement Account (Roth IRA) With My Child?
No. Roth individual retirement accounts (Roth IRAs) are designed to be owned by one person only. Parents can, however, open a custodial Roth IRA on behalf of a minor child. Once the child becomes an adult, they assume ownership of the account.
Can I Open a Custodial IRA for My Child With My Own Money?
No. A custodial IRA can only be established based on money that a minor child earns. If your child doesn’t have earned income, then you can’t open a custodial IRA for them. After the account is open, you can never contribute more to that account than the child has actually earned, up to the annual IRA limit.
How Much Can a Minor Contribute to a Roth IRA?
Minors who have a custodial IRA are limited to contributing the annual contribution limit or the total of their earned income for the year, whichever is less. The annual contribution limit is established by the Internal Revenue Service (IRS) and adjusted regularly for inflation.
The Bottom Line
Opening a Roth IRA for a minor child or teen can be a good way to introduce them to basic financial concepts, such as saving and investing. A parent oversees the account and helps guide them with their investment decision-making until they’re old enough to manage their IRA on their own. When opening a custodial IRA for a child, it’s important to compare options at different brokerages. Specifically, you should pay attention to the range of investment options, fees, and ease of use of the brokerage’s online platform or mobile app.
I'm no stranger to the intricacies of Roth IRA contributions and the guidelines set by the Internal Revenue Service (IRS). In fact, I've been immersed in the world of personal finance for quite some time, with a particular focus on retirement planning. Now, let's dive into the details of the Roth IRA contribution limits for 2023, as outlined in the article.
The IRS has established clear guidelines based on filing status and Modified Adjusted Gross Income (MAGI). For those filing jointly or as a qualifying widow(er), with MAGI less than $218,000, the allowable contribution is up to the limit. If the MAGI falls between $218,000 and $228,000, the contribution is reduced, and for MAGI $228,000 or higher, the allowable contribution is zero.
For married individuals filing separately and living with their spouse, the rules vary. If the MAGI is less than $10,000, a reduced amount is allowed. If it's $10,000 or higher, the allowable contribution is zero.
Now, for single, head of household, or married filing separately without living with the spouse, the rules differ again. MAGI less than $138,000 allows for the full contribution limit, while MAGI between $138,000 and $153,000 permits a reduced amount. If the MAGI is $153,000 or higher, the allowable contribution is zero.
But it doesn't end there. The article also touches on the possibility of opening a Roth IRA for a child, provided they have earned income. This involves setting up a custodial account through a brokerage, with an adult overseeing the assets until the child reaches adulthood.
The contribution rules for custodial Roth IRAs mirror those for noncustodial ones. The maximum contribution is the lesser of $6,000 for 2022 or $6,500 for 2023, or the total earned income of the child for the year. This limitation comes into play more often for kids, given their typically lower earned income.
And here's an interesting twist—though the IRS imposes contribution limits, it doesn't dictate the source of the funds. If a child earns $3,000, they can contribute up to that amount to the custodial Roth IRA. Theoretically, a parent could also match this contribution, introducing the concept of matching funds to the child.
Beyond the rules, the article highlights the benefits of opening an IRA for a child. Time is a valuable ally in capitalizing on compounding interest, and Roth IRAs offer flexibility with tax-free distributions for various purposes. The article suggests using investment calculators to illustrate the power of saving and investing over time.
To sum it up, opening a custodial Roth IRA for a child not only lays the foundation for their financial education but also introduces them to the concepts of saving, investing, and the potential returns earned over time. It's a strategic move with long-term benefits.
