Planning ahead is important, and I consider the Roth IRA a useful tool for every person who qualifies. That includes babies, who, like everyone else, should think about saving for their future. Because babies are not capable of comprehending what this is, their parent has to think for them.
For the 2023 tax year, you can contribute $6,500 if under age 50 or $7,500 if age 50 or older. There are income limits involved, but I doubt any babies even approach it. Even a mere $300 per year for the child’s entire childhood, with no further contributions made past age 18, could result in $143,400 at age 65 (assuming 6% rate of return) with a principal of merely $5,400. That is the power of compound interest! The money in a Roth IRA can be used for education or retirement, though one will have to be careful about when one takes out money if for education.
However, your baby can only contribute to a Roth IRA if she or he has earned income, which is basically everything that is not investment income. (This is probably to close the loophole of someone immediately gifting their newborn ~$125,000 for the purposes of allowing them to generate income through dividends.) Most babies cannot find earned income on their own, so it will involve some level of parental involvement, whether it is spending much too long buckling them in for a drive to their next audition or brushing their hair as they cry so they look presentable for their next photoshoot.
Given the effort involved in having a baby earn any amount, I do not see much point in helping a baby earn more than $6,500. In terms of taxes, the usual situations for a baby who has to file is a baby who earned:
- more than $400 in self-employed income;
- more than $1250 in unearned income;
- more than $13,850 in earned income;
- or who had a gross income that is greater than $1250 or earned income + $400.
The parent still has to pay income tax on the baby’s earnings if tax is owed and the baby does not pay it.
A baby who earns under $400 in self-employed income, which most work a baby is capable of would fall under, does not have to file taxes. You can choose to do so anyway to “spoil” the Social Security number for tax identity theft (because it is already being used by its proper owner).
What kind of work can a baby do? Small Sophie’s income falls under simple labor, being a model, and being an actress. Mostly because I am not invested enough in my baby’s career to be on call for next-day auditions in NYC as they pop up, Small Sophie has never earned more than $400 a year in her life yet. However, being a model/actress definitely earns her more than doing simple labor.
90% of Small Sophie’s income is from talking into a microphone or letting someone else take pictures of her. She earns between $25 and $100 per shoot and between $5 and $30 per voice project, but the jobs are rare. A baby who can do acting/modeling has to be able to follow directions and have at least an average-attractive voice/face.
I am sorry to say that, regarding simple labor, she is an unenviable employee. For example, in her very first session lasting 10-15 minutes, she completed only three items, with one to standard, one with reversed components, and one with 4 excess components; constructed sandwiches with the metal components instead of what she was supposed to do; and then contributed to shrink by running off with ~75% of metal pan components in a honey pot. Well, I suppose she was only 2.
The other important matter after figuring out where to get the income is where one can open the baby’s Roth IRA account. There were only two providers I could find who offered custodial Roth IRAs back when I was establishing it, Fidelity and one other that I will edit in after I remember. We use Fidelity for our custodial Roth IRA and have been satisfied.
