Can a Parent Contribute to a Child's IRA?

Parents (as well as legal guardians) are permitted to contribute to both Roth and traditional IRAs for their children, as long as those contributions come from a parent or legal guardian's taxable income. In fact, they can establish a custodial IRA, so minor children who are earning a taxable income can contribute to it. However, contributions from non-earned income -- such as a monetary gift from a grandparent who is living on Social Security, when the child did not earn income in his own name -- are not permitted.

As of the time of publiation, the maximum amount of money that could be contributed to both types of IRAs was, depending on which amount was smaller, either $5,000 or the full amount of a person's taxable income. As the parent, you can deposit whatever amount of that pre-defined figure -- whether it be $1, or $1,500, or the maximum contribution -- that you prefer in the child's IRA.

Instead of simply putting the money into the IRA, parents can employ their children if the parents run their own business. (Check the laws in your state regarding child labor practices and how old a child must be to work.) Kids can handle age-appropriate tasks, like emptying trash cans and sorting mail. An 1040-EZ income tax return must be filed, even if the child earned less than is required to send an income tax return, to serve as proof of income.

Parents can create a matching incentive program similar to those found in 401k plans that companies offer their employees. For example, the parents can match every $1 their child puts in the IRA, or double it, as long as the total contributions from the family don't exceed the maximum limit. They could match a percentage of whatever it saved every month, or offer a bonus if the child reaches a savings goal of, say $1,000, at the end of one year.

A prime time to contribute to a child's IRA is during special occasions. Instead of buying an expensive stereo for your son's birthday, give him a portable MP3 player and also give him a gift of $150 in his IRA. Graduations and holidays are other times where parents can reinforce the value of saving by purchasing affordable gifts and also setting aside funds for the future.