Individual Retirement Accounts provide income streams after age 59 1/2 without tax penalties. The Internal Revenue Service regulates IRA accounts and has no rule, as of 2010 codes, preventing a person under the age of 18 to own an IRA. You can own an IRA at any age, though you must stop contributing to a traditional IRA once you reach 70 1/2.
The IRS has no restriction on the IRA age for minors. The only qualification is the child must have declared earned income. This can be from a television commercial using the child's likeness or even a lemonade stand or summer life guarding job. If a child has $3,000 in annual income, the IRA contribution can be up to that earned amount. The total annual contribution for 2011 is $5,000. The IRA doesn't need to be funded by the earnings, only meet the qualification. This is good news for parents and grandparents wanting to help plan a child's future. Grandma can give the money for the IRA as long as the child had enough earnings in the year to cover the contribution.
Selecting a Minor's IRA
It's more common for parents and grandparents to think about college planning rather than retirement savings for a young child. However, because IRAs allow you to access capital for college tuition without any tax penalties, opening an IRA is a dynamic savings tool for the life of a person. Since an IRA is opened based on earned income, a child may not have enough income to benefit from a traditional IRA structure, where the tax-deduction reduces annual taxes. A Roth IRA allows tax-free growth without the deduction and becomes a better option in most cases.
It's the Kids Money
If you open an IRA for a child, you are giving them the money in an irrevocable and uncontrolled manner. Unlike other custodial accounts, such as Uniform Gift to Minor's Act accounts or Coverdell accounts where you maintain control of the money or, in some cases, still own it, the IRA is the child's money. As soon as the contribution is made, a minor old enough to sign for a distribution can take the money out or change investments without your consent. This may not be a good option for minors who have a spendthrift streak in them.
Old IRA Establishment
You can continue to contribution to an IRA in any year as long as you have the income to equal the contribution. As of 2011, if you are over the age of 50, your maximum contribution is $6,000. Traditional IRAs have mandated Required Minimum Distributions starting the year you turn 70.5. RMDs continue for the remainder of you life. Once you start the RMD phase, you are no longer able to contribute to the IRA. If you own a Roth IRA and are still working in your 70s, you are allowed to contribute to this IRA structure since you are not required to take RMDs out of the tax-free Roth. Just remember you need to own the Roth for at least five years to get tax-free distributions.