Underage Kids CAN Get Rich

Many people forget that kids CAN work for a company — while also sometimes obtaining a pretty good amount of money!

The notion of kids contributing to their own IRA, especially a Roth IRA, surprises lots of people and is not normally seen as a worthwhile tradition.

But it should be a tradition, because it’s a really good idea.

Here’s what you need to know about IRAs for kids. Let’s start with the Roth IRA option.

Roth IRA Contribution Basics

The only federal-income-tax-law requirement for a child to make an annual Roth IRA contribution is to have enough earned income during the year to cover the contribution. Age is completely irrelevant.

So if a child earns some cash from a summer job or part-time work after school, he or she is entitled to make a Roth contribution for that year.

For both the 2021 and 2022 tax years, your working child can contribute the lesser of

·his or her earned income for the year, or

·$6,000.

While the same $6,000 contribution limit applies equally to Roth IRAs and traditional IRAs, the Roth option is usually better for kids for the reasons explained later in this article.

Key point. A contribution for your child’s 2021 tax year can be made as late as April 15, 2022. So, there’s still time for that.

Income Restriction

There’s an income restriction on the right to make annual Roth IRA contributions.

For 2021 tax year contributions, the Roth contribution privilege for an unmarried taxpayer, such as your hardworking child, is phased out between modified adjusted gross income (MAGI) of $125,000 and $140,000.

For the 2022 tax year, the phase-out range is between MAGI of $129,000 and $144,000.

The income restriction won’t be an issue for your kid, unless he or she is the HEKOAT (highest-earning kid of all time), but we want you to be fully informed.

If your child’s earnings are from a regular self-employment activity — such as lots of yard work, babysitting, or pool cleanings — the child must include Schedule C with his or her Form 1040 and must fill out Schedule SE to compute the resulting self-employment tax bill, which will equal 15.3 percent of net self-employment income.