How Old Do You Have to Be to Open an IRA?

Many people assume opening an Individual Retirement Arrangement (IRA) is reserved for adults, leading to questions about the minimum age required. While the rules from the Internal Revenue Service (IRS) can seem complex, they are specific. Understanding these regulations is the first step for any young person, or their guardian, looking to get a head start on saving for the future. This article will clarify the requirements for opening an IRA for a minor.

The Earned Income Requirement

Contrary to widespread belief, there is no minimum age to open or contribute to an IRA. Eligibility is not based on age but on having earned income, which the IRS defines as taxable compensation. This includes wages, salaries, tips, and net earnings from self-employment. This means a child of any age, even an infant who earns money from a modeling job, can potentially have an IRA opened for them.

For most teenagers and young adults, earned income comes from part-time or summer jobs. Income from self-employment, such as babysitting or mowing lawns, also qualifies. Money received as a gift, an allowance, or investment income does not count as earned income and cannot be used for an IRA contribution.

The amount contributed to a minor’s IRA is also limited. It cannot exceed the minor’s total earned income for the tax year or the annual IRA contribution limit set by the IRS, which is $7,000 for 2024 and 2025. For example, if a teenager earns $3,000 from a summer job, their IRA contribution for that year cannot be more than $3,000.

Understanding Custodial IRAs

Since individuals under the age of 18 or 21 are considered minors, they cannot legally open financial accounts. Therefore, an IRA for a minor must be a custodial account managed by an adult, such as a parent or guardian. The adult acts as the custodian for the benefit of the minor, who is the account beneficiary. While the funds legally belong to the minor, the custodian controls all account activities. This includes choosing the financial institution, making contributions, selecting investments, and authorizing distributions.

All account statements are also sent to the custodian. This control is temporary. Once the minor reaches the age of majority in their state, the custodian must transfer full control of the account to them, at which point it becomes a standard IRA.

When setting up the account, the custodian will choose between a Traditional and a Roth IRA. For most minors, the Roth IRA is the more common choice. Contributions to a Roth IRA are made with after-tax dollars, and since most minors have little to no taxable income, they are in a low tax bracket. This allows the investments to grow tax-free, and qualified withdrawals in retirement are also tax-free, which is an advantage over many decades.

Information Needed to Open a Custodial IRA

To open a custodial IRA, the adult custodian must provide information for both themselves and the minor. For the minor, the financial institution will require their full legal name, date of birth, and Social Security number. An IRA cannot be opened for a minor without a Social Security number.

The custodian must also provide their own full name, date of birth, residential address, and Social Security number. Financial institutions are required by federal law to collect this information to verify the identity of the person opening and managing the account.

Documentation of the minor’s earned income for the year is also needed. A copy of a W-2 form is sufficient for a formal job. For self-employment income, like from babysitting or lawn care, detailed records should be kept, including the type of work, when it was performed, and the amount paid. While this proof may not be required at account opening, it is necessary to validate contributions if the IRS ever questions them.

The Process of Opening the Account

The first step is to select a financial institution, such as a bank or brokerage firm, that offers custodial IRAs. It is wise to compare a few options, looking at any potential account fees, the range of investment choices available, and the ease of use of their online platform.

Once a provider is chosen, the custodian will complete the custodial IRA application, which is often done online. After submitting the application, the financial institution will review it, with approval often happening within a few business days. Upon approval, the custodian will receive confirmation and the necessary account documents.

The final step is to fund the new account. This is typically done by linking an external bank account and transferring money to the IRA.