It seems to be common advice to setup a Roth IRA for a child. But a child isn't usually eligible to have a Roth IRA because they don't have compensation.
The rules for Roth IRAs are laid out by the IRS.
The two requirements to be eligible to contribute to a Roth IRA are:
- Have taxable compensation.
- Earn less than $116,000 for single or $169,000 for married.
What exactly qualifies as taxable compensation? Taxable compensation is defined by the IRS in the traditional IRA descriptions.
Taxable compensation includes:
wages, salaries, etc.
commissions.
self-employment income.
alimony and separate maintenance.
nontaxable combat pay.
but does NOT include:
earnings and profits from property.
interest and dividend income.
pension or annuity income.
deferred compensation.
income from certain partnerships.
any amounts you exclude from income.
Furthermore the amount you contribute to your Roth IRA is limited by the lesser of your taxable compensation or the contribution cap. So if you have say, $3,000 in taxable income then that is lower than the normal $5,000 limit and you're only able to contribute the $3,000 lower amount.
Bottom line: Make sure you are eligible for a Roth IRA before contributing to one and a key eligibility requirement is having taxable compensation.