Can I Open a Roth IRA for My 2-Year-Old?
We want to save for our son's future, but we're hesitant about 529 plans. Can we put a toddler on the payroll and open a retirement account for him?
Dear Robin,
My wife and I both work full time, but we also run a side business together. We have a 2-year-old son, and we want to start saving for his future.
I’d like to open a Roth IRA for him. That way, we could save for his future without it being tied to college. It’s too soon to know if he’ll even want to go to college or if he’ll get scholarships, etc.
I’m also aware that you need a job to start a Roth IRA. Could I put my son on my business payroll so I can get him saving for retirement early?
-G.
Dear G.,
Even the Gerber Baby is allowed to have a Roth IRA because there’s no minimum age requirement.
But the Gerber Baby has earned income. That’s basically IRS speak for “money you earn from working,” and it’s required to fund an IRA.
If you’re putting your child on the payroll, the IRS has a few more rules: You’ll need to make sure the work is age-appropriate and that you’re paying them a reasonable rate for the job.
The idea could work if your business needs a toddler model. But if you claim a 2-year-old is your company janitor, bookkeeper, or receptionist? You’re practically begging for IRS scrutiny.
So yeah, meeting those criteria is going to be tough while your son is still a toddler. But a recent change could make a 529 plan worth another look.
529 plans are designed primarily for education savings. As of 2024, though, you can roll over up to $35,000 of unused 529 funds into a Roth IRA for the beneficiary (your son in this case) once the account is at least 15 years old.
That means that if your son decides not to go to college or chooses a cheaper school than you anticipated, you could use the extra money to jumpstart his retirement savings with a Roth IRA.
One other advantage of a 529 plan is that you or your wife would control the account. But with a Roth IRA, your son would have full control once he turns 18.
Of course, you’d want him to do the responsible thing and let that money keep growing. But a lot of us weren’t exactly concerned about retirement savings at 18. It’s impossible to know how a child will manage money when they’re still in diapers.
No one can predict their 2-year-old’s educational aspirations. But having the option to roll over 529 funds into a Roth IRA should erase some of your worries about what happens if your son doesn’t need that money for college.