TeenBusiness.com > Teenvestors > IRAs > IRA Eligibility

Anyone who works and thus receives earned income, or more specifically, taxable compensation (defined to include wages, salaries, tips, and amounts received for providing personal services), during the year can establish a Roth IRA.

The issue of what qualifies as earned income, for purposes of the Roth IRA, has generated a great deal of discussion in investment and tax circles. Everyone agrees that if a Teenvestor receives a W-2 form from a business (such as fast food restaurants, copy center, the local mall, etc.), this qualifies as proof of earned income for purposes of establishing a Roth IRA. But what about those situations where a Teenvestor does work around the neighborhood such as lawn mowing, or gets paid by his parents for work done in the home? These “jobs” do not generate a W-2. Some experts say that even in these situations, the Teenvestor has received earned income and is eligible to establish an IRA as long as the employee and the employer (parents, relatives, friends, neighbors, etc.) keep a record of the type of work performed, the number or hours worked, and the wages received.

We suggest that you consult your parents and a tax professional on the matter if you think you have earned income that can’t be substantiated by a W-2. The law is just not clear-cut in this area

While a Teenvestor can have more than one type of IRA in addition to the Roth IRA, such as a traditional IRA, his combined contributions to a Roth and traditional IRA can’t exceed the lesser of his total yearly wages or $3,000 (see maximum limits for each year). This means that if your taxable compensation is less than $3,000, you may only contribute as much as you earn. If you earn more than $3,000 per year, the maximum amount you can contribute each year is $3,000.

Teenvestors can’t contribute to their IRA in years in which they have no earned income. On the other hand, once the IRA is established, it is not necessary to contribute to it for every year in which income is earned. Contributing more than the amount allowable for the year to "make-up" for years in which little or no contribution was made is not permitted.