Roth IRA For Your Child With Cash Income

by | | Investing, Other Cool Stuff, Retirement, Taxes

This post explains how to fund a Roth IRA for your child with cash income that is not reported to the IRS.


Your child must have earned income that the IRS knows about to contribute to a Roth IRA.

It’s easiest to open a Roth IRA for your child when they have a W-2 from their job as a barista or camp counselor. This is because the W-2 reports their income to the IRS.

What if your child has cash income not reported to the IRS, like from lawn mowing or babysitting? Your child can still use a Roth IRA, but they should file a tax return (like it or not). This causes some tax and hassle, but it may be worth it. Read on to help you decide.

What Not To Do

Say your child’s cash income for 2022 was $2,500. Should you fund a Roth IRA for your child, without your child filing a tax return?

The answer is No. The IRS can catch this because the custodian of your child’s Roth IRA must report the $2,500 contribution to the IRS, and the IRS won’t be able to find at least $2,500 of corresponding earned income for your child in their records.

File A Tax Return For Your Child

Dependent children don’t have to file a federal tax return unless they earn more than $12,950 (2022). This assumes they have no unearned income like dividends or interest. Most kids earn less than $12,950 and don’t have dividends or interest, so most kids don’t file tax returns.

However, if your child has cash income and wants to make a Roth IRA contribution, they should file a tax return. Filing a return reports the income to the IRS, which permits the child to make the Roth IRA contribution.

Tax Return Results

Say your child earned $2,500 cash. They file a tax return so they can make a Roth IRA contribution.

Your child is treated as a self-employed lawn care provider or babysitter. So, their tax return will have a Schedule C (Profit or Loss From Business, Sole Proprietorship) showing $2,500 net profit.

The results will be:

  • Tax of $383 ($0 income tax, $383 self-employment tax).
  • Maximum Roth IRA contribution of $2,308.

Maximum Roth IRA Contribution

Note that the max Roth IRA contribution is $2,308, not $2,500.

For a self-employed individual, earned income for the purpose of Roth IRA contributions is equal to net profit minus 1/2 the self-employment tax. (Don’t ask why; just accept it!)

$2,500 – $192 ($191.50 rounded up) = $2,308 max Roth IRA contribution.

CYA Note

Technically, anyone with at least $400 of self-employment income must file a tax return.  So, if your child earned at least $400 from lawn mowing or babysitting, they are supposed to file a tax return whether they want to fund a Roth IRA or not.  In the real world, children don’t file tax returns for modest amounts of cash earnings, unless they want to fund a Roth IRA.

State Tax Return Required?

Your child may or may not need to file a state tax return too.  Check the requirements for your state.  Specifically, look at the instructions for your state’s tax return.  For example, the Illinois tax return is the IL-1040.  The instructions will specify who must file.  The lower the child’s income is, the less likely they’ll have to file a state return.

Is Filing A Tax Return Worth It?

Weigh the benefits of making the Roth IRA contribution against the costs of filing the return.


  • Tax-free growth in the Roth IRA for decades.
  • Using the Roth IRA to teach your child about money.


  • Tax due ($383 in this case).
  • Tax prep cost (more CPA time, or an extra TurboTax return).
  • Your time and energy to deal with this.

If you’d like to open a Roth IRA for your child, but you’re too busy to make it happen, schedule a FREE Financial Pulse Assessment™. This is a 3-step process to get clarity on your finances and “test drive” our services.

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