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The Benefits of Establishing an IRA for a Minor

Secure a bright future for your child by saving early with a minor IRA.

Posted on August 18, 2023

Minor IRA

Every parent dreams of providing the best possible future for their child, filled with opportunities, security, and a strong foundation to chase their aspirations. Though, in a world of ever-changing challenges and uncertainties, it requires more than just a dream to achieve your goals. It demands strategic financial planning.

Securing the best future for your child begins with a simple yet important (and impactful) step: saving early. One way this can be done is by establishing an IRA for the minor. That's right – anyone can have an IRA as long as they have earned income, even those that are under the age of 18. With many creative strategies available, utilizing a minor IRA to save for your child's future during their early years can create remarkable outcomes for years and years to come. In this article, we'll discuss how you can start building a nest egg for your minor.

What Exactly Is a “Minor IRA”?

A Minor IRA is a type of individual retirement accounts (IRAs) that gives a parent or legal guardian the ability to contribute on behalf of a minor. Whether it be a Traditional or a Roth IRA, these accounts specialize in allowing parents and guardians to start building a retirement nest egg for their child from an early age. While minor IRAs are owned by the child, they are managed by the parent or legal guardian until the child reaches what is called “the age of majority,” which is typically 18 or 21, depending on the state laws. Then, once the child reaches the age of majority, control of the account is transferred to them, allowing them the responsibility to manage the account, make future contributions, and control their investment decisions.

Just as you would expect with a normal Traditional or Roth IRA, these accounts provide the same tax benefits to minors, such as the ability to get tax-deductions or qualified withdraws later in life (depending on the type of account the child has). It very quickly becomes clear to see how these minor IRAs can be valuable, not only as a way to save for your child's future, but also as tools to teach kids a number of financial lessons.

Defining Earned Income

So, what is “earned income” as it relates to a minor? According to the IRS, "Earned income includes all the taxable income and wages you get from working for someone else, yourself or from a business or farm you own." This means that if your child receives income documented on Form 1099 or W-2, that income qualifies. For a minor, this means that earnings from tasks like babysitting, yard services, or participating in a parent's business may also be considered. For example, some real estate professionals will use their children as paid models for advertising materials, and this could be a way a child could gain income.

No matter what creative path a parent or guardian takes, proper documentation must exist that show the amount the child received, the type of the work, and the timeframe. It's a good rule of thumb that parents should seek advice from a tax consultant or other financial advisor to confirm that their child's income is actually considered earned income.

Knowing how much to contribute is also key. The contribution limit is the lower of either of these two options: 1) their earned income amount, or 2) $6,500 in 2023. And although contributors cannot claim a tax deduction for contributions made to a minor IRA, in this case a Traditional IRA, the child may be eligible for a deduction if they file a tax return in their own name.

Why Consider a Minor IRA for Your Child?

The biggest benefit of establishing a minor IRA is arguably the fact that your child can start growing their nest egg as early as possible, but there are other reasons why one might consider establishing a minor IRA. Another advantage offered by minor IRAs is the potential accessibility of funds for significant costs, especially if the account is a Roth IRA, which allows withdrawals of contributions if the account has been established for at least five years. Traditional IRAs, although they have stricter guidelines, can also allow for penalty-free withdrawals – under specific circumstances.

Another consideration might be educational expenses. Account holders can utilize funds for educational costs, but it's still important to note that they will be liable for taxes on the earnings. Still, using the money for qualified education expenses such as tuition, fees, books, supplies, equipment, most room and board, and many other expenses do not incur the 10% early withdrawal penalty. Additionally, withdrawals before the age of 59½ for first-time home purchases are possible when a child has a minor IRA, provided the funds are employed for a down payment or closing costs. (Note – this withdrawal is capped at $10,000.)

Choosing the Right Account for Your Child

Once you've decided that a minor IRA might be the right choice for your child, you'll want to decide which account will be best suited for them. Minors have the option to have a Traditional IRA or a Roth IRA. However, if they're earning a lower income and don't make enough to owe taxes, the tax advantages of a deductible Traditional IRA contribution might not be as helpful. Because many kids don't make a lot of money, they don't really get much advantage from the tax break you get upfront with regular IRAs. So, in most cases, it's smarter for them to go for Roth IRAs instead and have tax-free growth. Roth IRAs are better for young people with low incomes now because they'll probably end up in a higher tax bracket later on.

Let's look at an example. If a child keeps money in a Roth IRA until they're 59½ (according to today's rules), they won't have to pay any taxes when they take it out. When they retire, they'll likely have more money and be in a higher tax bracket. That means they'll get to keep more of their cash. Then, even if the minor child wants to use the money before that age, a Roth IRA is still a good idea. This account works well for those whose tax situation will probably be worse when they take the money out compared to when they put it in.

Also consider the type of investments you would like the ability to make on your child's behalf. Maybe instead of investing in the stock market, you want the ability to invest in real estate? With a self-directed IRA, the funds can be invested in a wide range of alternative assets. You can even partner their IRA with your IRA to be able to purchase larger investments.


As you can see, establishing a minor IRA for your child offers a strategic pathway towards securing their financial future. By starting a Roth IRA or a Traditional IRA on their behalf, you set the stage for long-term advantages that extend well into adulthood. The tax-efficient growth, compounded over time, can accumulate major savings that serve as a valuable resource for their education, life milestones, and eventually… retirement. In addition, financial awareness and responsibility from a young age empowers them with essential skills that will – hopefully – contribute to a lifetime of smart money management. Overall, it's very clear to see the benefits of establishing a minor IRA. Start creating the journey to provide your child with a solid financial foundation and call or schedule a 1 on 1 with one of Quest's IRA Specialists to learn how.

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