Minors and IRAs
By Mary Hopkins, CISP
Can a minor open and contribute to an IRA?
There is no age restriction for contributing to a Traditional or Roth IRA. The primary eligibility requirement is that a person must have eligible compensation. Some examples of eligible compensation for IRA contributions include wages, tips, salaries, and commissions. According to Revenue Procedure 91-18, IRA owners can rely on compensation as shown in the Wages, tips, other compensation, box, reduced by any amount properly shown in the Nonqualified plans, box on Form W-2, Wage and Tax Statement, as income for determining an IRA contribution. Cash payments, such as for babysitting, lawn care, or other services that a minor might provide, could also be considered acceptable compensation. Individuals receiving cash compensation should keep detailed records of when they were paid and how much they received. Individuals should also consult with a competent tax advisor when determining whether their earned income is considered eligible compensation for IRA contribution purposes.
How much can they contribute?
The 2022 contribution limit is $6,000 for individuals under age 50. Individuals who earn less than the limit can contribute up to 100 percent of their eligible compensation. For example, if a minor has $4,500 in eligible compensation, she may only contribute up to $4,500 for the year. Roth IRA contributions are also subject to modified adjusted gross income (MAGI) limits. If an individual’s MAGI exceeds these limits, he will be ineligible to make a Roth IRA contribution.
Can a minor sign IRA documents?
An IRA is a legal contract between a financial organization and the individual. Most states restrict minors from signing a contract until they reach the age of majority, which can vary from age 18 to 21. A parent or legal guardian can co-sign the IRA documents and manage the IRA until the minor attains the age of majority.
What happens when a minor inherits an IRA?
A parent or legal guardian may need to sign any documents required to set up an inherited IRA for a minor. Minors may have different payout options as an IRA beneficiary, depending on their relationship to the original IRA owner. If the minor is not the IRA owner’s child (e.g., the minor is a grandchild, niece, or nephew), then the minor could use the 10-year rule or take a lump sum distribution. The 10-year rule requires beneficiaries to completely distribute their portion of the IRA by December 31 of the year containing the tenth anniversary of the IRA owner’s death. If the IRA owner was the minor’s parent, then the minor would be considered an eligible designated beneficiary and would have the additional option of taking life expectancy payments until the year that they reach the age of majority. Once the minor reaches the age of majority, the minor would then become subject to the 10-year rule, and would need to distribute all assets from the inherited IRA within 10 years.
Proposed RMD regulations, issued in February 2022, state that the age of majority for beneficiary purposes is age 21. In addition, if the IRA owner died on or after the required beginning date—April 1 following the year the IRA owner attained age 72—the 10-year rule would require the beneficiary to take annual distributions during the first 9 years and a total distribution by December 31 of the year containing the tenth anniversary of the IRA owner’s death. If the inherited IRA was a Roth IRA, annual payments would not be required of the beneficiary, since there are no RMDs or required beginning date for the original Roth IRA owner.
