When you hear "retirement account," you probably don't picture your teenager who just finished a summer lifeguarding job. But that's exactly who can benefit from a Roth IRA for kids. It's a special type of retirement account designed for minors, allowing them to get a massive head start on their financial future.
Essentially, by opening a custodial Roth IRA, a parent or guardian can manage the account and invest the child's earnings from jobs like babysitting or working at the local ice cream shop. This turns their first paychecks into a powerful engine for long-term, tax-free growth.
Why a Roth IRA for Your Child Is a Financial Superpower
Think about planting a tiny seed. With decades of sunlight and water, it can grow into a colossal oak tree. That's the perfect way to think about a Roth IRA for a child. It gives them the one thing no adult investor can ever buy more of: time.
This isn't just a savings account. It's about putting the incredible force of compound growth to work over an exceptionally long runway. When a kid starts investing, even small, seemingly insignificant amounts have the potential to balloon into a huge nest egg by the time they're ready to retire.
The Magic of Compounding Over Decades
A Roth IRA for a minor is like a financial time machine. Every dollar they contribute gets to travel forward for 50, 60, or even 70 years, collecting earnings on top of earnings before it's ever needed. Two key ingredients make this so potent:
- Compound Growth: This is where the real magic is. It’s not just their initial investment that grows; the earnings themselves start generating more earnings. It creates a snowball effect that picks up speed year after year.
- Tax-Free Withdrawals: This is the game-changer. Since contributions are made with after-tax money, every single qualified withdrawal in retirement—both the original contributions and all the growth—is 100% tax-free.
This one-two punch gives your child an unbelievable head start on building financial security. It transforms their first few paychecks from simple spending money into a serious, long-term asset.
How a Custodial Roth IRA Works
At its core, a Roth IRA for kids is just a specialized retirement account that lets minors contribute money they’ve earned from a job or a side hustle. There are rules, of course. The annual contribution limit for 2024 is $7,000 or the total amount of the child's earned income for the year, whichever is less.
So, if your daughter earns $2,500 from babysitting over the summer, that’s her maximum contribution for the year. A parent or guardian opens and manages the account as the custodian until the child legally becomes an adult. This specific setup is known as a custodial Roth IRA.
To give you a quick overview, here are the main features of a Custodial Roth IRA.
Custodial Roth IRA At a Glance
| Feature | Description |
|---|---|
| Account Type | Custodial Roth Individual Retirement Account (IRA) |
| Eligibility | Open to any minor with legitimate earned income |
| Management | Managed by an adult custodian (parent, guardian) until the child reaches the age of majority |
| Contribution Limit (2024) | $7,000 or the child's total earned income for the year, whichever is less |
| Tax on Contributions | Contributions are made with after-tax dollars |
| Tax on Withdrawals | Qualified withdrawals of contributions and earnings are 100% tax-free in retirement |
| Key Benefit | Maximizes the power of compound growth over an exceptionally long time horizon (50+ years) |
This structure is designed to be simple: your child earns money, you help them save and invest it in their Roth IRA, and that money grows without ever being taxed again.
By starting early, a child not only learns valuable financial habits but also locks in decades of tax-free growth potential that is impossible to replicate later in life.
Who Can Open One for a Child?
Any parent, grandparent, or guardian can open a custodial Roth IRA for a minor. There’s just one non-negotiable rule: the child must have legitimate earned income. This is the key that unlocks the whole opportunity.
The money can come from a formal summer job with a W-2, or it can be from self-employment gigs like mowing lawns, pet-sitting, designing websites, or selling crafts online. As long as it's real work for real pay, it counts.
Starting this process is about more than just money; it's a powerful, hands-on lesson in earning, saving, and investing. It demystifies the world of finance and empowers your child with the skills and confidence they’ll need for a lifetime of smart money decisions. When they finally enter the workforce as young adults, they won't be starting from scratch—they'll be building on a foundation you helped them lay years earlier.
The Golden Rule of a Kid's Roth IRA: It Must Be Earned
If there's one non-negotiable rule to understand about a Roth IRA for kids, it's this: the money has to come from legitimate, earned income. This isn't just a guideline; it's a hard-and-fast requirement straight from the IRS. So, what exactly does "earned income" mean when we're talking about a 10-year-old with a lawn-mowing business? It's simpler than you might think and perfectly suited for today's young go-getters.
Think of it as money your child gets for actual work they’ve done. This rule exists to make sure the account is funded by your child's own labor, not just cash gifts from you or their grandparents. It’s what makes this whole thing possible and kicks off their journey toward understanding money in a real, tangible way.
What Kind of Work Actually Counts?
So, what jobs make the cut? The IRS is surprisingly flexible here, giving us two main categories that cover a ton of ground. This is great news for kids and teens who are just dipping their toes into the working world.
The two official types of earned income are:
- W-2 Income: This is the most traditional type of earnings. It comes from a formal job where an employer handles taxes and sends a W-2 form at year-end. Classic teen jobs fit perfectly here—working as a camp counselor, lifeguarding at the local pool, or bagging groceries.
- Self-Employment Income: This is where the possibilities really open up. Any money your child earns from a business they run themselves is fair game. We're talking babysitting, dog walking, tutoring, and even modern side hustles like selling crafts on Etsy, managing a small business's Instagram, or coding a simple website for a neighbor.
The IRS defines earned income as wages from a job or net earnings from self-employment. The critical piece to remember is that you can only contribute up to what your child actually earned in a given year. If your daughter makes $3,000 designing websites after school, her Roth IRA contribution for that year can’t be more than $3,000, even if the official annual limit is higher. You can dig deeper into these IRS rules for kid-focused savings to see how it all works.
How to Prove Your Kid's Side Hustle is Real
With a W-2 job, the paperwork is a given. That form is your proof. But for self-employment, parents often get a little nervous. How do you prove their dog-walking empire is legit? The answer is simple: keep good records. You don't need fancy accounting software.
Keeping clear records isn't just about satisfying the IRS. It’s a fantastic teaching moment. You're showing your child firsthand how a real business tracks its income and expenses, turning their hustle into a powerful lesson in financial management.
A basic spreadsheet or even a dedicated notebook works perfectly. To stay compliant and confident, just make sure you log a few key details for every job:
- Date of Service: When did they do the work? (e.g., June 15, 2024)
- Description of Work: What did they do? (e.g., Babysitting for the Smith family)
- Customer Name: Who paid them? (e.g., Jane Smith)
- Amount Paid: How much did they make? (e.g., $45)
- Related Expenses: Did they have any costs? (e.g., $5 for craft supplies)
- Net Income: What was the final profit? (e.g., $40)
By keeping this simple log, you build a clear, defensible record of their self-employment income. This is the documentation you'd need if the IRS ever asked, and it forms the official basis for their Roth IRA contributions. It’s how you turn their entrepreneurial spirit into a real, investable asset.
Your Step-By-Step Guide to Opening the Account
Alright, you’ve got a handle on the earned income rules, so what’s next? It's time to actually open the account. Don't worry, setting up a custodial Roth IRA is surprisingly straightforward. Think of this as your game plan—we'll walk through picking a brokerage, getting your paperwork in order, and what it really means to be the account's guardian.
Opening these accounts for kids wasn't always so simple. The Roth IRA itself only came into existence with the Taxpayer Relief Act of 1997, becoming available in 1998 as a new way to encourage after-tax savings. As more people recognized the power of starting early, major players like Charles Schwab, Fidelity, and J.P. Morgan stepped up, offering custodial Roth IRAs designed specifically for minors. If you want to dive deeper, Fidelity offers a great overview of the history and contribution limits on their website.
Step 1: Choose the Right Brokerage Firm
First things first: you need a home for this account. You're looking for a brokerage firm that specifically offers custodial Roth IRAs. The good news is that most big, reputable firms do, and many of them have eliminated account minimums and maintenance fees, which is perfect for getting started.
So, how do you pick one? It boils down to a few key things:
- Investment Choices: You'll want a place with a wide menu of low-cost options. Think index funds and Exchange-Traded Funds (ETFs)—they are fantastic for building long-term, diversified wealth without a lot of hassle.
- Ease of Use: Is their website or mobile app intuitive? A clean, user-friendly platform makes managing the account much less of a chore.
- Customer Support: When you have a question—and you will—it’s great to know you can get a helpful person on the phone or chat.
Big names like Fidelity, Charles Schwab, and Vanguard are popular for a reason. They all have a solid reputation and offer strong investment products geared toward investors with a long time horizon.
Step 2: Gather the Necessary Documents
Once you've picked your firm, the next step is to round up the required paperwork. Having everything ready ahead of time turns a potentially tedious task into a quick win. The brokerage just needs to verify the identities of both you (the custodian) and your child (the account owner).
Here’s a simple checklist of what you'll almost certainly need:
- Your Child's Information: Their full legal name, date of birth, and Social Security number are essential.
- Your Information: You’ll need to provide your own name, date of birth, and Social Security number, too.
- Proof of Your Child's Income: This is the big one. While you might not need to upload it during the application, you must have it. This is your documentation proving the contributions are legit—whether it’s a W-2 from a summer job or the detailed logbook you kept for their entrepreneurial efforts.
Think of your role as the account custodian like being the trusted guardian of a treasure chest. You hold the key, make the decisions to protect and grow the contents, but the treasure inside always belongs to the child.
Step 3: Understand Your Role as Custodian
Being the "custodian" isn't just a title; it's a legal responsibility. You are the fiduciary, which is a fancy way of saying you must manage the account solely for your child's benefit. You’re in the driver’s seat until they reach the age of majority in your state, which is usually 18 or 21.
Your duties include:
- Opening the account in their name.
- Making contributions (making sure not to exceed their earned income for the year).
- Choosing and managing the investments inside the account.
- Keeping an eye on the account's performance over time.
This role is also a golden teaching opportunity. You can sit down with your child and show them how it all works—from contributing money to picking investments and watching the magic of compound growth unfold. For more tips on making it a great learning experience, our comprehensive guide on how to start a Roth IRA for a child is a fantastic resource.
Step 4: Plan for the Seamless Transition
The last piece of the puzzle is knowing what happens when your kid isn't a kid anymore. Once they hit your state's "age of termination," legal control of the Roth IRA automatically transfers to them.
The brokerage will have a simple process for this. It usually involves a bit of paperwork to officially retitle the account in your child's name and remove you as the custodian. From that day forward, the account is theirs to manage, built on the incredible financial foundation you helped them create.
Smart and Simple Investment Strategies for Kids
https://www.youtube.com/embed/_GFWMCU2S-o
Okay, the custodial Roth IRA is officially open. Now what? For many parents, this is the part that feels a little intimidating. You're probably wondering what, exactly, you should be investing in.
Here's the good news: you don’t need to be a Wall Street whiz. Your child’s greatest asset isn’t a hot stock tip; it’s their enormous time horizon. With fifty or more years before they’ll even think about retirement, you can lean into a simple, growth-focused strategy.
This is your straightforward playbook for making smart, low-stress choices that will put your child’s money to work for the long haul.
Embrace the "Set It and Forget It" Mindset
When it comes to a child's Roth IRA, the simplest approach is almost always the best one. The goal isn't to time the market or chase the next big thing—even the pros struggle with that. The real strategy is to buy a small piece of the entire market and just let it grow.
This is where the idea of diversification comes into play. Think of it like a fruit basket. Instead of betting your entire lunch on a single apple (one stock), you fill your basket with a wide variety of fruits (hundreds or even thousands of stocks). This spreads out the risk. If one apple turns out to be bruised, your whole basket isn't ruined.
This is why low-cost, "set-it-and-forget-it" funds are perfect for this job. They offer instant diversification and are built for the kind of long-term growth that makes a Roth IRA for a kid so powerful.
Top Investment Choices for a Kid's Roth IRA
When you log into the brokerage account, you’ll see a massive menu of investment options. It can feel overwhelming. To cut through the noise, let's focus on three powerful and easy-to-understand choices that are widely recommended for their simplicity, low costs, and long-term focus.
-
S&P 500 Index Funds or ETFs: This is a classic for a reason. An S&P 500 fund holds tiny pieces of the 500 largest, most established companies in the U.S. By buying a single share, you're instantly invested in household names across every major industry.
-
Total Stock Market Index Funds or ETFs: Want to take diversification even further? A total stock market fund invests in pretty much every publicly traded company in the country, from the biggest corporations down to small, emerging businesses. It's the ultimate "buy the whole haystack" strategy.
-
Target-Date Funds: These are the definition of hands-off investing. You just pick a fund with a year close to when your child might retire (like a "Target-Date 2085" fund). The fund automatically starts with a growth-focused mix and gradually becomes more conservative as that date gets closer, managing the risk for you over decades.
The big idea here is to use low-cost funds to capture the growth of the overall economy. Over long periods, the stock market has historically trended upward. These investments are designed to simply ride that wave without you needing to become a stock-picking genius.
Picking any one of these is a fantastic way to get your child’s money working. They are built on the proven principles of long-term investing, which is a perfect match for the incredible opportunity a custodial Roth IRA offers. By keeping it simple, you avoid the classic mistakes of over-trading and high fees, allowing the magic of compounding to do its thing for decades.
How a Roth IRA Stacks Up Against Other Savings Tools
As a parent, you're faced with a dizzying array of options for saving for your child's future. It’s enough to make anyone’s head spin. When you first hear about a Roth IRA for kids, a natural question pops up: how does this fit in with the accounts I already know, like a 529 college fund or a custodial brokerage account?
It’s tempting to pit these accounts against each other, but that's not quite the right way to think about it. They aren’t competitors; they’re more like players on a team, each with a specific position in your family's financial game plan.
A Roth IRA is your long-range player, built for tax-free retirement growth. A 529 is your specialist, focused on education. And a UTMA/UGMA is your utility player, good for general savings. Seeing them this way helps you build a financial strategy that covers your child’s entire life, not just one single goal.
The image below shows the single most important rule for a kid's Roth IRA: the contribution amount is directly linked to how much they earned that year.
This isn't just a technicality; it's the core principle of the account. The Roth IRA is a reward for their work, and their income sets the contribution ceiling.
Roth IRA vs. 529 Plan
The most common showdown people imagine is the Roth IRA versus the 529 plan. It’s an understandable comparison—both offer incredible tax benefits, but they are engineered for completely different purposes.
A 529 plan is a tax-advantaged account designed specifically for education expenses. Your money grows tax-deferred, and every dollar you pull out is tax-free, provided it’s used for qualified education costs. This includes college tuition, room and board, and even up to $10,000 per year for K-12 private school.
A Roth IRA, on the other hand, is a retirement account, plain and simple. Its primary superpower is generating tax-free income decades from now. While there are a few exceptions that let you take money out early without penalty (like for a first home), its core mission is funding your child’s life long after their career is over.
Think of it like this: the 529 is a short-to-medium-term tool for a very specific goal. The Roth IRA is the ultimate long game.
Roth IRA vs. UTMA/UGMA Accounts
Another option you'll see is a custodial brokerage account, known by the acronyms UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act). These accounts offer far more flexibility than either a 529 or a Roth IRA.
Essentially, a UTMA/UGMA is a straightforward way for an adult to invest money on behalf of a minor. There are no contribution limits and no restrictions on how the money is used, as long as it benefits the child. But that freedom comes with a significant trade-off: there are no special tax advantages.
Investment gains in a UTMA/UGMA account are taxed every year. For 2024, the first $1,300 of a child's investment income is tax-free, the next $1,300 is taxed at the child's (usually lower) rate, and anything beyond that gets hit with the "kiddie tax," meaning it’s taxed at the parent's higher rate.
Once the child reaches the age of majority (typically 18 or 21, depending on the state), the account is theirs, free and clear. While UTMA/UGMAs are great for general savings, they completely lack the powerful tax-free growth that makes a Roth IRA such a game-changer for building long-term wealth.
Roth IRA vs 529 Plan vs UTMA/UGMA Account Comparison
Sometimes, seeing it all laid out is the easiest way to understand the differences. This table breaks down the key features of these three popular accounts for kids.
| Feature | Custodial Roth IRA | 529 Plan | UTMA/UGMA Account |
|---|---|---|---|
| Primary Goal | Retirement Savings | Education Savings | General Savings |
| Contribution Source | Must be from child's earned income | Anyone can contribute (gifts) | Anyone can contribute (gifts) |
| Tax on Growth | Tax-Free | Tax-Deferred | Taxable Annually ("Kiddie Tax") |
| Tax on Withdrawals | Tax-Free (for qualified withdrawals) | Tax-Free (for qualified education) | N/A (taxed annually) |
| Control | Child gets control at age of majority | Account owner (parent) always has control | Child gets control at age of majority |
| Flexibility of Use | High (contributions can be withdrawn anytime) | Low (penalties for non-education use) | Very High (for the child's benefit) |
Each of these accounts has a specific job to do. When used together, they give you the power to build a financial foundation that will support your child from their first day of school to their last day of work—and well into a comfortable retirement.
Your Top Roth IRA for Kids Questions, Answered
As you start to explore what a Roth IRA could do for your child, the practical questions are sure to pop up. This isn't just about theory—it's about your child's future and your family's money. To help you move forward with total confidence, we've tackled the most common questions and sticking points that parents run into.
These are the nitty-gritty details that are so easy to overlook but are absolutely critical for getting everything right. From matching your kid's contributions to understanding the impact on financial aid, let's clear up the confusion.
Can I Match My Child’s Contributions?
This is a fantastic question and a very popular strategy. The short answer is yes, you absolutely can contribute money to your child's Roth IRA. Think of it as a "family 401(k) match." But there's one golden rule you have to follow.
The total amount put into the account—whether from you, your child, or a generous grandparent—cannot be more than what your child actually earned that year. For instance, if your daughter makes $1,500 from her summer babysitting gig, the absolute maximum that can go into her Roth IRA for the year is $1,500. You can gift her that full amount to deposit, but you can’t go a dollar over what she officially earned.
What About Early Withdrawals?
One of the most powerful features of a Roth IRA is its surprising flexibility. While it’s built for the long haul (hello, retirement!), we all know life can throw a curveball or two.
Here’s the breakdown on taking money out early:
- Contributions: The money you and your child originally put in can be withdrawn at any time, for any reason, completely tax-free and penalty-free. Why? Because that money was already taxed before it went in.
- Earnings: Taking out the investment gains before age 59½ is where it gets tricky. Those withdrawals are generally hit with both income tax and a 10% early withdrawal penalty.
However, the IRS provides a few key exceptions to that penalty, like using the money for a first-time home purchase (up to a $10,000 lifetime limit) or for qualified higher education expenses. This built-in flexibility makes the Roth IRA an incredible, multi-purpose financial tool.
Will a Kids Roth IRA Affect College Financial Aid?
This is a huge one for parents trying to save for both college and their child's future retirement. You’ll be happy to know that a custodial Roth IRA generally has a minimal impact on financial aid.
When it comes time to fill out the FAFSA (Free Application for Federal Student Aid), retirement accounts owned by the student, including Roth IRAs, are not currently considered reportable assets. This is a massive advantage over other accounts like a standard UTMA/UGMA brokerage account, which is counted as a student asset and can significantly reduce the amount of aid a student receives.
Think of it this way: a Roth IRA for your child is basically invisible on the FAFSA form. This lets you help them build a nest egg for their 60s without hurting their chances of getting need-based funding for their 20s.
What Kind of "Family Business" Income Qualifies?
Lots of parents wonder if paying their child for chores or odd jobs around the house is good enough to count as "earned income." The IRS has a clear standard here: the work has to be legitimate, and the pay has to be reasonable for the job performed.
Everyday household chores like making the bed or washing the dishes? That won't fly. But, if you own a business and your child is doing real work for it, that income is perfectly valid.
Let’s look at a couple of examples:
- Legitimate Work: You run a marketing agency and pay your teenager $15/hour to schedule social media posts and organize client files. This is a real task with a fair market wage.
- Questionable Pay: You pay your 9-year-old $5,000 to "organize the home office" over a long weekend. The IRS would almost certainly see this as a disguised gift, not actual earned income.
The rule of thumb is pretty straightforward: if you’d be willing to pay a stranger the same amount to do the same job, it’s probably legitimate. Just make sure you keep good records of the work they did and the payments you made.
Ready to get your child started on the path to financial freedom? Head over to RothIRA.kids for our free starter guide. You can also play with our interactive tools to see just how powerful early investing can be for building generational wealth. Find out more at RothIRA.kids.
Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial or investment advice. We are not financial advisors, and the content presented here is not a substitute for professional advice. All financial decisions involve risk, and you should consult with a qualified financial professional who can assess your individual circumstances before making any decisions. The authors and publishers of this content assume no liability for any actions taken based on the information provided herein.