Summer Savings: Yes, Kids With Jobs Can Have an IRA

Jul 14, 2021

By Theresa Fry, Senior Vice President, Manager of IRA’s, Retirement & Education Planning

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It is hard to be out and about these days without seeing help wanted signs. They are everywhere.  Restaurants, grocery stores, and retailers small and large are trying to hire workers. For students on summer break from college or high school, those summer earnings can be more than just some extra dollars in their pocket. Working wages equate to compensation that can be used to open and fund a traditional or Roth IRA.

Convincing a student to save some of their paycheck can be an uphill climb even if they are trying to save for a car, a cell phone, or something else they have prioritized for a future purchase.  Convincing them to save for retirement may be an even more difficult challenge. But here is the good news: if the student has earned the income, anyone can make the contributions to their IRA account. If you think it is important to teach them the value of saving early and often, or the basics of investing, there’s always the option of having them contribute a portion of their wages, while you provide an incentive, such as a matching contribution.

There are a few important things to keep in mind when considering an IRA for a student:

  • If your child will be working but not at a place where they get a regular paycheck, it’s important that the child’s wages are documented. Household chores don’t typically count as earned income, but money earned from steady summer jobs like mowing lawns or babysitting that are from someone other than a parent can be treated as earned income. Make sure you discuss your situation with your tax professional for guidance on what kinds of records to keep for the type of employment your child has before making contributions.
  • Contributions are limited to 100% of earned income or $6,000, whichever is less. If the student earns $3,000 during the year, then $3,000 is the maximum amount that can be contributed to their IRA for that year.
  • If the student has not reached the age of majority for their resident state, typically age 18 or 21, then a parent or legal guardian must also be named on the IRA. As a minor, the student will not be able to make investment or withdrawal decisions; the adult named on the account will have to do so on their behalf.
  • IRAs owned by students are not counted when applying for college financial aid on the Federal Application for Student Aid (FAFSA).

When deciding what type of IRA to use, keep in mind that the tax advantages of a traditional IRA and a Roth IRA are different.

  • Traditional IRAs can provide an income tax deduction for individuals with lower incomes but if the child does not file an income tax return, the tax deduction may be of little value. Traditional IRA contributions are generally included in taxable income when distributed and can also be subject to a 10% early withdrawal penalty if taken before the age of 59½.
  • Roth IRA contributions are not tax deductible and are not reported on a federal income tax return. Roth IRA contributions can be withdrawn without income taxes or penalties.  Earnings on contributions may be taxable and subject to the 10% early withdrawal penalty if they are removed before reaching age 59½ and the Roth IRA has not been funded for at least five years.  However, after satisfying the combination of five years and age 59½, earnings are also income tax-free.

Time is the best ally when using tax-advantaged savings accounts like IRAs, so help your working students get a jump start by contacting a financial advisor today!


Benjamin F. Edwards does not provide tax advice; therefore, it is also important to consult with your tax professional for additional guidance tailored to your specific situation.