How to start Roth IRAs for your kids

Dear Liz: I would like to start a Roth account for each of my kids. (They’re in their 30s.) Is it better to start an account in my name with them as beneficiaries or to start the accounts in their names?

Answer: Roth IRAs can be a wonderful way to save, but they’re not custodial accounts. You won’t be able to control the accounts or prevent your adult children from spending any money you deposit.

If you still want to help, though, let your kids know you’ll contribute to any Roths they set up. They can open a Roth if they have earned income at least equal to the annual contribution and their incomes are below the Roth limits. The ability to contribute to a Roth phases out between $178,000 to $188,000 for married couples in 2013 and from $112,000 to $127,000 for singles.

Ideally, you’ll contribute to your own Roth first. The limit on contributions is $5,500 this year.

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  1. Why can’t you set up a Roth IRA for your children and they wouldn’t know until you retired?

    • You can set up a Roth IRA for yourself and leave it to your kids. To set up a Roth in your child’s name, you would have to assume your kid’s ID, including using his or her SSN, to fool a financial institution into opening the Roth…which would be a weird form of ID theft. In any case, the ruse likely wouldn’t last long, since the financial institution sends out tax forms every year declaring the value of the account.

  2. Not retired, but died…so in your will.

  3. So, what would be a good way to set something up for my grandkids, then? They are 15 and 14 years old. I’ve read that if a kid starts saving money when they’re in their late teens, they can retire as millionaires, so I want to contribute something every year for at least ten years starting when they’re 16. However, I do not want them to be able to get into it. I’m afraid if I have it set up so that they can access it, one or the other will decide when he’s 23 that he wants a new car. That’s not gonna fly with me, so what do I do?

    • It depends on how much money you’re talking about. If it’s a whole lot, you could create a trust that would dole the money out at set intervals and fund it while you’re still alive. A simpler approach would be to open accounts in your own name and name them as beneficiaries. You might still want to create a trust in your will that would dole the money out should you die while they’re still young.

  4. “…open accounts in your own name and name them as beneficiaries. You might still want to create a trust in your will that would dole the money out should you die while they’re still young.”

    That’s exactly what I want – thanks so much!

  5. P.S. What kind of accounts would I want?

    • Just a regular brokerage account would work, with the kids (or a trust to benefit the kids) named as beneficiaries. Talk to an attorney about the wording if you’re going to use a trust.

  6. More to the point, the Internal Revenue Service doesn’t allow you to fund IRAs with unearned income, so if there are no wages, there is no ability to fund an IRA for anyone. If the kids don’t have jobs, no one can start IRAs for them.