You may already know about 529 plans, savings accounts, and other vehicles you can use to save for your child’s future. But a lesser-talked-about (but perhaps even more effective) tool available is the custodial Roth individual retirement account (IRA) or a Roth IRA for Kids.

This type of account helps you and your child save for their future once they start working. While IRAs are generally used as retirement accounts, the flexibility of Roth IRAs can allow your child to use the money for far more. 

If you’re considering saving for your children’s future, make sure you understand how these accounts work, their key benefits, and who they might be right for.

How Does a Custodial Roth IRA Work?

A custodial Roth IRA is a type of individual retirement account that a parent or another custodian manages on their child’s behalf. It’s designed for minors who haven’t yet reached the age of majority in their state. 

These accounts are subject to the same rules and requirements as any other Roth IRAs, except for the addition of the custodian. That person controls the investment decision and account management. Once a child reaches 18 or 21 (depending on the state), the assets are transferred to a new account in just their name.

Like all other Roth IRAs, these custodial accounts are funded with after-tax dollars, meaning your contributions aren’t tax-deductible. However, all earnings within the account and qualified withdrawals are tax-free. In other words, you’ll never pay taxes on those dollars again once you contribute them.

This tax advantage makes the Roth structure a great option for young investors who have decades to allow their investments to compound tax-free.

Who is Eligible for a Custodial Roth IRA?

The only eligibility requirements to contribute to a Roth IRA are that you have earned income and that your income doesn’t exceed the limits set by the IRS.

The earned income component makes IRA-saving difficult for children. After all, most children don’t have jobs. However, custodial Roth IRAs are a good option for older children who earn money at a family business, part-time job, or side gig like babysitting or lawn mowing.

On the other end of the spectrum, you can’t contribute to a Roth IRA if your income exceeds $168,000 in 2025. Luckily, most children don’t earn this much income, so you’re unlikely to run into this roadblock. The parents’ income isn’t a consideration for determining their child’s Roth IRA eligibility.

There’s no minimum age limit to open a custodial Roth IRA. However, as children can’t open their own investment accounts, they must have an adult who can act as a custodian open the account on their behalf. This adult is usually a parent or grandparent, but can technically be any adult.

Why Your Child Needs a Custodial Roth IRA

Plenty of parents completely skip over the idea of opening a custodial Roth IRA for their children. After all, isn’t it too early to be saving for retirement? But you might be surprised just how invaluable this type of account can be.

A custodial Roth IRA gives your child the gift of time. If you contributed $7,500 per year (the limit in 2026) for four years, then your child would have more than $1.6 million by the time they reach age 60, assuming a 10% average annual return (the average, according to the SEC). And that’s without them contributing another dollar to their retirement.

Alternatively, your child has the option to use their Roth IRA funds for plenty of other purposes. The IRS allows investors to withdraw money penalty-free for things like higher education, buying a home, or the birth or adoption of a child.

Additionally, Roth IRA contributions (but not earnings) can be withdrawn from the account at any time with no taxes or penalties. In other words, your child could truly use that money for anything (though it may be most beneficial if left in the account).

Custodial Roth IRA Rules, Requirements, and Contribution Limits

One of the most important Roth IRA rules, as we’ve already discussed, is the earned income rule. Your child can only contribute (or you can only contribute on their behalf) up to 100% of their earnings for the year. So, if your child earns $5,000, that’s the maximum that can be contributed.

For this purpose, documentation is essential. It’s not enough to pay your child an allowance for the chores they do around the house. Your child must have a W-2 or 1099 to prove their income.

It’s important to note that it doesn’t actually have to be your child’s income that’s contributed to the account. If your child earns $5,000 throughout the year, you could let them keep their earnings, and then contribute $5,000 of your own dollars to their account.

Roth IRAs do have a maximum contribution limit. In 2026, workers can contribute up to $7,500 to a Roth IRA, up from $7,000 in 2025. But remember, the limit is the lesser of $7,500 OR their earned income. If your child earns less than $7,500 in the year, the amount they actually earn is their contribution limit.

Custodial Roth IRA Withdrawals and Distributions

As we mentioned, Roth IRAs have especially flexible withdrawal rules, but it’s still possible to run afoul of them if you aren’t careful.

You can withdraw your Roth IRA contributions at any time, for any reason, without taxes or penalties. This applies no matter what the account holder’s age or how long the account has been open.

As for the account earnings, the rules are a bit more restrictive. You can only make a qualified distribution from a Roth IRA if it’s been at least five years since the start of the year you opened the account, and one of the following is true:

• You reach age 59½.
• You’re permanently disabled.
• You’re the account beneficiary, and the account owner has died.
• You’re buying your first home and withdrawing up to $10,000.

Any other distributions of earnings are subject to income taxes and a 10% early withdrawal penalty.

There are some additional exceptions to the 10% penalty, as well as unique rules for Roth IRA rollovers. Make sure to read the IRS rules to see if any of these apply to you.

Pros and Cons of Custodial Roth IRAs

Pros

• Tax-free growth: Your money will grow and compound tax-free as long as it remains in the account.
• Tax-free withdrawals: As long as you meet the qualified distribution rules, you won’t pay taxes on your withdrawals.
• Withdrawals of contributions: You can withdraw your original contributions from the account at any time with no taxes or penalties.
• Long-term investment growth: Even just a few years of contributions can turn into more than $1 million by the time your child retires.

Cons

• Earned income requirement: Contributing to a Roth IRA requires earned income, which many minors don’t have.
• Contribution limits: Roth IRAs have fixed contribution limits ($7,500 in 2026), even for higher-earning children.
• Loss of parental control: Once the child reaches the age of majority (18 or 21 depending on their state of residence), they get full control of the account and could theoretically withdraw all the funds for any purpose.
• Opportunity cost: At a young age, there are plenty of other ways that money could be used, including 529 plans, UTMA accounts, and more.
• Limits on withdrawals: Your child will pay taxes and penalties on any earnings they withdraw from the account before retirement age, with certain exceptions.
• Financial aid eligibility: Funds in a custodial Roth IRA are a student asset and are included in financial aid considerations. 

Setting Up a Custodial Roth IRA

Opening a custodial Roth IRA is a fairly straightforward process. Any adult including a parent, grandparent, or guardian, who will serve as the custodian of the account, can open it with nearly any major brokerage firm, including Vanguard, Fidelity, or Charles Schwab. You’ll follow the step-by-step instructions to open the account, providing personal information about both yourself and the child (i.e., Social Security numbers, birth dates, etc.), as well as supplying proof of the child’s earned income. 

Once the account is open, you can connect it to a bank account for transfers, and then choose your investment options. You can either set up automatic transfers and investments, or make one-off contributions as needed.

When you’re comparing different brokerage firms, make sure to consider factors like account fees, trading fees, expense ratios, investment options, user experience, and more. Plenty of brokerage firms offer educational resources on their websites and apps, which could be especially beneficial for children just learning to invest.

Eligible Investments and Growth Potential

As the account custodian, you have a duty to invest the money in a custodial Roth IRA in the best interests of the child. The options you’ll have to choose from will vary depending on the brokerage firm you choose, but you can typically choose from stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more.

As you’re choosing investments, consider opting for low-cost, diversified funds, such as those that track the total stock market or the S&P 500. These will have an annual return that tracks the stock market overall. Another option is a target-date fund, which automatically adjusts its asset allocation based on the investor’s age and the number of years until retirement.

You may also consider using the custodial Roth IRA as a teaching tool and involving your child in the asset collection. While you likely want the majority of the money invested in diversified funds, it may be worth setting aside a small amount (think 10% or less) for your child to invest in individual stocks of companies they’re excited about.

Tax Advantages and Considerations

One of the most attractive features of a custodial Roth IRA is that once you’ve paid taxes on the income you contribute, you’ll never have to pay taxes on those dollars again. It’s one of the few accounts that offers tax-free investment growth and tax-free withdrawals.

Compare that to traditional IRAs, which have tax-deductible contributions and tax-deferred investment growth, but then require income taxes on the money you withdraw during retirement. The relatively low income and low tax burden for young people make the Roth IRA a more compelling option, in most cases.

Remember that these tax benefits only apply if your child uses the account as intended. If they withdraw all of their investment earnings before they reach retirement age, they’ll still pay income taxes on them, along with an added 10% penalty. It’s important to educate your child about the account’s benefits and rules before they take over control of it when they turn 18 or 21.

Is a Custodial Roth IRA Right for Your Family?

Whether a custodial Roth IRA is right for you depends on your family’s financial situation, your child’s employment status, and your financial goals for your child.

First, a custodial Roth IRA is only an option if your child has earned income. If they don’t, there are plenty of other accounts available, including UTMA accounts and 529 plans (if you’re saving for college). 

You should also consider your savings goals for your child. A Roth IRA provides plenty of flexibility, meaning you can use the money for college, buying a house, or simply leave it in the account for retirement. But if you want to create liquid spending money for your child, it may not be the best option.

Finally, you should consider whether you want to turn control of those funds over to your child when they turn 18. Many parents worry their children aren’t responsible enough to handle a large sum of money at such a young age. If that’s your fear, you may be better off keeping the account in a taxable brokerage account in your name.

Keep in mind that you should only consider funding your child’s custodial Roth IRA once your own financial needs are met. If your retirement account isn’t fully funded, make sure to prioritize that over saving for your child’s future. While it seems selfish, you’ll do them a disservice if you set aside money for them, but then create a situation where they may be financially responsible for you later on.

If you’re considering opening a custodial Roth IRA for your child and aren’t sure if it’s the right choice, let us help. Our team of experienced advisors can assess your financial situation and goals, and advise you on the best course of action. Set up a complimentary consultation today to get started.

Custodial Roth IRAs FAQs

What is a custodial Roth IRA?

A custodial Roth IRA is a Roth IRA held for a minor and managed by an adult custodian until the child reaches adulthood in their state.

What is a Roth IRA for Kids?

A Roth IRA for Kids is another name for a custodial Roth IRA.

When does the child take control of the custodial Roth IRA account?

The custodian manages the account until the child reaches age 18 or 21 (depending on the state). Then the account is transferred into the child’s name.

Who can contribute to a custodial Roth IRA?

Anyone (child, parent, grandparent, guardian, etc.) can contribute to a custodial Roth IRA, but the total amount cannot exceed the child’s earned income for the year.

Are there income limits for contributing to a custodial Roth IRA?

A child must have earned income and meet IRS income limits. In 2025, contributions are not allowed if income exceeds $168,000. The parents’ income does not determine the child’s eligibility.

Is there a minimum age to open a custodial Roth IRA?

No. There is no minimum age, but an adult custodian must open the account for a child.

How much can be contributed each year?

The contribution limit is the lesser of (1) 100% of the child’s earned income for the year or (2) the annual Roth IRA cap, which is listed as $7,500 in 2026 (up from $7,000 in 2025).

What proof of earned income is needed?

A child should have documentation such as a W-2 or 1099.

Can a parent fund the contribution with their own money?

Yes. If the child earns income (for example, $5,000), a parent can contribute that amount from the parent’s money while the child keeps their earnings.

Can the child withdraw money at any time from a custodial Roth IRA?

Contributions can be withdrawn anytime for any reason without taxes or penalties. Earnings have stricter rules and may trigger taxes and a 10% early-withdrawal penalty if the withdrawal is not qualified.

What makes a custodial Roth IRA earnings withdrawal “qualified”?

The Roth IRA must be open at least five years, and one of these must apply: the owner is age 59½, permanently disabled, deceased (distribution to beneficiary), or using up to $10,000 for a first home purchase.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. 

Prior to investing in a 529 Plan, investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

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