Roth IRAs: Put Your Child’s Summer Earnings to Work

Roth IRA: Put your child's summer earnings to work Blog Header

Roth IRAs: Put Your Child’s Summer Earnings to Work

With plentiful opportunities for teen employment, this year now is the perfect time to consider opening a Roth IRA for your minor child. Here’s what you need to know.

What is a Roth IRA?

A Roth IRA is a type of IRA that allows you to make after-tax contributions rather than pre-tax contributions, as you would with your own IRA or your employer’s 401(k). While a regular IRA and a Roth IRA are similar in many ways, it is critical that the account be set up as a Roth IRA when it is created.

A Roth IRA follows the same rules as a traditional IRA, with the following exceptions:

  • Contributions to a Roth IRA are not deductible.
  • Qualified distributions are tax-free if you meet the requirements.
  • There is no age limit for making regular contributions to traditional or Roth IRAs in 2020 and later.
  • You can leave money in your Roth IRA for as long as you live; however, the account or annuity must be set up as a Roth IRA.

Roth IRAs for Minors

Minors are generally not allowed to open brokerage accounts in their own names until they reach the age of 18. As a result, an adult must act as custodian. A Roth IRA for minors is also known as a custodial account Roth IRA or a Roth IRA for Kids. The benefits are the same regardless of the name.

Here’s how it works:

The custodian opens and maintains control of the minor child’s Roth IRA, as well as decisions about contributions, investments, and distributions. The custodian also receives account statements.

As custodians, parents must remember that the account belongs to the minor child even though they control and maintain it. As a result, the funds in the account must be used to benefit the minor. When a minor reaches the age of 18, or 21, depending on the state, assets must be transferred to a new account in their name.

Earned Income. A minor can only contribute to a Roth IRA if they have earned income from a summer or after-school job, or earnings from self-employment such as babysitting, pet sitting, or lawn mowing. As a reminder, self-employment earnings of $400 or more may be subject to self-employment taxes such as Medicare and Social Security.

Most teenagers will not be required to file a tax return; however, they should keep a written log of hours worked in case the IRS contacts them with questions later.

Contributions. For 2022, the maximum Roth IRA contribution is the lesser of $6,000 or the total earned income of the child. If your child earns $3,000 this year, the maximum contribution is $3,000 (rather than $6,000). Parents may contribute to their child’s account as long as the total contribution amount (child and parent) does not exceed your child’s earned income for the year. Using the previous example, if the child earned $3,000 but only wanted to contribute $1,500 to their Roth IRA, the parent could contribute another $1,500.

Even if your child only makes a one-time investment today, the sooner they begin saving, the more time their money has to grow because of the power of compounding.


Information Regarding Custodial Roth IRA Accounts?

Even though your teen may not see the benefit of making a contribution to a retirement account right away, they will appreciate it later. Please don’t hesitate to get in touch with us if you have any questions about Roth IRAs for minors. You can reach us at or call us at 713-855-8035.

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Qualified Charitable Distribution from IRAs

Qualified Charitable Distribution from IRAs

Qualified Charitable Distribution from IRAs

Consider taking advantage of legislation that allows you to reduce or eliminate the amount of income tax on IRA withdrawals transferred directly to a qualified charitable organization if you are 70 1/2 or older. Even though minimum distributions are no longer required until the age of 72, you can use this strategy. Qualified Charitable Distributions (QCDs) can also be used to meet all or a portion of your required minimum distribution.

Here’s an example:

Assume your required minimum distribution in 2022 is $22,000 per year. If you make a qualified charitable distribution of $15,000 in 2022, you must withdraw an additional $7,000 to meet the amount required for your required minimum distribution in 2022.

Whether you are still working or not, required minimum distributions (RMDs) must be taken each year after you reach age 72 (70 ½ if you reach 70 ½ before Jan. 1, 2020). The RMD is calculated each year by dividing the IRA account balance as of December 31 of the previous year by the applicable distribution period or life expectancy. Your Roth IRAs are exempt from this rule.

What is a Qualified Charitable Distribution (QCD)?

A qualified charitable distribution (QCD) is an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual over the age of 70 1/2 and paid directly from the IRA to a qualified charity.

What are the Rules?

Unlike most tax-related rules, the rules for QCDs are relatively simple:

  • The QCD must be made from a traditional IRA, Roth IRA, or individual retirement annuity, rather than a simplified employee pension, a simple retirement account, or an inherited IRA.
  • The QCD must be a direct transfer from the IRA trustee to the charitable organization; the organization must qualify for an individual charitable income tax deduction; no private foundations (i.e., that give out grants); and the organization must acknowledge the charitable contribution in the same way that a charitable income tax deduction or donor-advised fund does.

Tax Advantages of QCDs

Taxable IRA distributions, even if donated to charity, must generally be included in adjusted gross income (AGI). You may be able to deduct charitable contributions, but you may be subject to a 50 percent AGI limitation, which means you won’t be able to deduct the full amount in that tax year and may be taxed on the difference.

QCDs avoid this potential issue because they are tax-free, and you can deduct the entire amount as a charitable contribution.

This also means that there is no increase in your AGI that could, for example, raise your income tax on Social Security or cause your Medicare insurance premiums to rise. It may also reduce deduction amounts for, say, medical expenses, which are currently limited to amounts greater than 7.5 percent of AGI.

Furthermore, because there is no increase in income, you may be able to take the standard deduction (often a higher dollar amount and more beneficial than itemizing) and claim the charitable contribution deduction.

Reporting a QCD on your Income Tax Return

Form 1099-R reports charitable distributions for the calendar year in which they are made. Form 1099-R should be delivered to you by January 31, 2023. You generally report the full amount of a qualified charitable distribution on the line for IRA distributions on your Form 1040 tax return to report a qualified charitable distribution. If the entire amount was a qualified charitable distribution, enter zero on the line for the taxable amount and “QCD” next to this line.

If you made the qualified charitable distribution from a traditional IRA in which you had basis and received a distribution from the IRA other than the qualified charitable distribution during the same year, you must also file Form 8606, Nondeductible IRAs; or the qualified charitable distribution was made from a Roth IRA.


If you need more information about qualified charitable distributions or have questions about IRAs and minimum required distributions for IRAs and how they affect your taxes, please contact us.

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You still have time to make an IRA Contribution for 2021!

IRA Contribution Form

You still have time to make an IRA Contribution for 2021!

Are you behind in your 2021 IRA Contributions? Don’t worry, you still have time to make an IRA contribution for 2021. If you haven’t contributed funds to an Individual Retirement Account (IRA) for the tax year 2021, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 18, 2022, due date (April 19 if you live in Maine or Massachusetts), not including extensions.

The good news is that you can make your 2021 IRA contribution at any point while the tax year is active. But before you do, we have a friendly reminder: make sure that you tell the trustee who holds your IRA account that the contribution is for 2021. This helps them report it correctly, and it ensures that the funds are added to your account in a timely manner.

You can contribute up to $6,000 of your earnings for tax year 2021 (up to $7,000 if you are age 50 or older) to an IRA, either a traditional IRA or a Roth IRA (if you qualify). You can choose to fund both, but your total contributions cannot be more than these amounts.


Traditional IRA

You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer’s pension plan.

This means that even if you don’t meet some of the qualifications for deducting an IRA contribution from your taxes, you still may be able to do so. For instance, if you have a high income and are covered by a pension plan at work, you may be able to deduct your contribution up to the amount of your total compensation.

The IRS website has more information on how to qualify for a tax-deductible IRA contribution.


Roth IRA

You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Roth IRAs are funded with after-tax dollars, so you cannot deduct your contributions from your taxes.

If you take out your money before age 59 1/2 (or before age 55 if you have changed jobs), you will have to pay taxes and penalties on that money unless you qualify for an exception (for example, if you are disabled or use the money to buy a first home).

A qualified distribution happens when:

  1. You take out your money after age 59 1/2
  2. You take out your money because of death or disability
  3. You take out your money to buy a first home for up to $10,000

Each year, the IRS announces the cost of living adjustments and limitations for retirement savings plans

To ensure you’re saving as much as possible, check out the newest updates each year.



You’ve probably heard it before, but saving for retirement should be an important part of anyone’s financial planning. It’s important to review your retirement goals each year and make sure you’re maximizing your savings.

Need help navigating your tax compliance this year? Hurry and send us a message today while you still have time to file your taxes!

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