As a parent, you dream of giving your child a head start in life. You teach them to ride a bike, help with homework, and cheer from the sidelines. But what if you could give them a multi-decade head start on their financial future? What if you could set them on a path to potential tax-free wealth, long before they even think about their first real job? It’s not a fantasy—it’s possible with a Roth IRA for kids.
Opening a custodial Roth IRA is one of the most powerful financial gifts you can give your child, turning their small earnings from summer jobs or side hustles into a significant nest egg. This guide will walk you through everything you need to know about the Roth IRA for kids, a cornerstone of building generational wealth.
What Is a Roth IRA for Kids?
A Roth IRA for kids, also known as a custodial Roth IRA, is a retirement savings account designed for minors who have earned income. It functions just like a standard Roth IRA, but with one key difference: since the child is a minor, an adult (usually a parent or grandparent) must act as the custodian, managing the account until the child reaches the age of majority in their state (typically 18 or 21).
The magic of this account lies in its tax structure. Contributions are made with after-tax dollars, meaning the money your child puts in has already been taxed. In return, the investments within the account grow completely tax-free, and qualified withdrawals in retirement are also 100% tax-free. For a child with decades of growth ahead of them, this is an unparalleled advantage.
“Starting a Roth IRA for a child is like planting a redwood tree,” says financial planner Sarah Jensen. “It may start small, but with time and consistent nurturing, it can grow into something magnificent and enduring. The power of compound growth over 50 or 60 years is almost impossible to overstate.”
The Unbeatable Benefits of a Custodial Roth IRA
Why is a child Roth IRA such a powerful tool? The benefits extend far beyond just saving money.
1. The Power of Compounding
Time is the most valuable asset in investing. When a child starts investing at age 10 instead of 25, they gain 15 extra years of compound growth. Let’s look at a simple example:
- Child A invests $2,000 a year from age 10 to 18 ($18,000 total) and then stops, letting it grow.
- Child B starts at age 25 and invests $2,000 a year for 30 years ($60,000 total).
Assuming a 7% average annual return, Child A—who invested far less—could have a larger nest egg by retirement age, all thanks to those crucial early years of compounding.
2. Tax-Free Growth and Withdrawals
This is the headline benefit. Because contributions are made after-tax, your child will never have to pay taxes on the growth or qualified withdrawals from this account in retirement. Given that tax rates are historically low, it’s likely a smart move to pay taxes now rather than later in life when their income (and tax bracket) may be significantly higher.
3. Teaches Financial Literacy
A custodial Roth IRA is a hands-on financial classroom. It provides the perfect opportunity to teach your child about fundamental concepts like:
- The value of saving and investing
- The difference between stocks and bonds
- The concept of compound growth
- The importance of long-term thinking
4. Unmatched Flexibility
While it’s designed for retirement, a Roth IRA offers flexibility that other accounts don’t. Contributions (the money you put in) can be withdrawn at any time, for any reason, tax-free and penalty-free. This makes it a viable, albeit last-resort, fund for major life expenses like buying a first home or even paying for college.
How Does a Roth IRA for Minors Work?
Understanding the mechanics is simple. Here are the key components:
The Earned Income Requirement
This is the most important rule. A child can only contribute to a Roth IRA if they have legitimate earned income. This means money earned from a job, whether it’s a formal W-2 job (like a grocery store clerk) or self-employment income (like babysitting, mowing lawns, or dog walking). Allowance or gifts do not count.
(For a deep dive, check out our article: What Counts as Earned Income for a Kid’s Roth IRA?)
Contribution Limits
The amount your child can contribute is limited. For 2025, the contribution limit is the lesser of:
- $7,000 (the annual IRA contribution limit set by the IRS)
- The child’s total earned income for the year.
For example, if your child earns $2,500 from a summer job, they can contribute up to $2,500 to their Roth IRA for that year. As a parent, you can even contribute on their behalf, as long as the amount doesn’t exceed their earned income.
(Stay updated with our guide: Roth IRA for Kids: The Official Rules and Contribution Limits for 2025)
The Custodian’s Role
As the custodian, you are responsible for:
- Opening and managing the account.
- Making investment decisions (ideally with your child’s input).
- Filing any necessary paperwork.
Once your child reaches the age of majority (18 or 21, depending on your state), the account is transferred into their name, and they take full control.
How to Get Started
Ready to open an account? It’s easier than you think.
- Ensure Your Child Has Earned Income: This is the first and most critical step. Document this income carefully.
- Choose a Brokerage: Select a financial institution that offers custodial Roth IRAs. Major firms like Fidelity, Schwab, and Vanguard are popular choices.
- Gather Your Documents: You’ll typically need your Social Security number and your child’s.
- Open the Account: Complete the online application for a custodial Roth IRA.
- Fund the Account and Invest: Transfer money into the account and choose your investments. Many parents opt for low-cost index funds or target-date funds as a simple, diversified starting point.
(For a detailed walkthrough, read our guide: How to Open a Custodial Roth IRA for Your Child in 5 Simple Steps)
The First Step to a Brighter Financial Future
Opening a Roth IRA for kids is more than just a smart financial move; it’s an investment in your child’s future, a lesson in responsibility, and a tool for building generational wealth. By starting early, you are giving them the incredible gift of time—the single most powerful factor in wealth creation.
Ready to empower your child’s financial journey? Explore our free calculator to see how small contributions today can grow into a massive nest egg tomorrow.
Disclaimer: The information provided in this article is for educational purposes only and is not intended as financial, investment, or legal advice. RothIRA.Kids is not a financial or legal firm. We encourage you to consult with a qualified professional before making any financial decisions.