A custodial Roth IRA is an account a parent or guardian opens and manages for a child who has earned income

The account belongs to the child legally, but you control it until they reach the age of majority — usually 18 or 21, depending on your state. The child can contribute only money they actually earned from a job or self-employment, not allowance or gifts. Once the money goes in, it grows tax-free, and withdrawals in retirement are tax-free too, just like a regular Roth IRA.

The main difference from an adult Roth IRA is the custodian requirement. You make the investment choices and handle all the paperwork until the child takes over. The child cannot touch the money without your permission until they reach the age of majority, at which point the account becomes theirs to manage.

Key Takeaways

  • Your child must have earned income from work — babysitting, lawn care, part-time jobs, or self-employment — to contribute anything at all.
  • The contribution limit is the smaller of what your child earned that year or the annual Roth IRA limit, which varies by year.
  • You choose the investments and manage the account until your child reaches the age of majority, then they take full control.
  • Money withdrawn before age 59½ is usually subject to taxes and penalties, but there are narrow exceptions for education and first-time home purchases.

Who can open a custodial Roth IRA and what income counts

You can open a custodial Roth IRA for any child who has earned income, regardless of age. The child does not need to be a teenager — a six-year-old with earnings from a modeling job or a family business can have one. The key requirement is that the income must be real wages or self-employment earnings, not money from parents, relatives, or investment returns.

Earned income includes W-2 wages from an employer, 1099 self-employment income, or net profit from a business the child owns. It does not include allowance, gifts, investment dividends, or money from a trust. If your child earned $3,000 that year, the maximum contribution is $3,000. If they earned $500, the maximum is $500, even if the annual Roth IRA limit is higher.

You must be the parent, legal guardian, or custodian to open the account. Some financial institutions also allow grandparents or other relatives if they have legal custody. Check with the bank or brokerage about their specific rules.

How much your child can contribute each year

The contribution limit is the smaller of two numbers: what your child actually earned that year, or the annual Roth IRA contribution limit set by the IRS. The IRS limit changes most years. For example, if the limit is $7,000 and your child earned $4,500, they can contribute only $4,500. If they earned $10,000 and the limit is $7,000, they can contribute only $7,000.

You can contribute the money yourself using your own funds, but the contribution must come from the child's earned income. In other words, you can write the check, but only if your child actually earned that amount. The IRS requires documentation — usually a copy of the child's tax return or a letter from their employer showing wages paid.

There is no age limit for contributions, and there is no income limit for custodial Roth IRAs the way there is for adults. A high-earning teenager can contribute the full annual limit.

How the account grows and what happens at withdrawal

Once money is in the account, it grows tax-free. You choose where to invest it — stocks, bonds, mutual funds, or cash, depending on what the financial institution offers. The child does not pay taxes on the growth, and they do not pay taxes on withdrawals in retirement, as long as the account has been open for at least five years and they are at least 59½ years old.

If your child withdraws money before age 59½, they usually owe income tax on the earnings portion and a 10% penalty. However, there are exceptions: withdrawals for a first-time home purchase (up to $10,000 lifetime) or for may have access to education expenses may avoid the penalty, though taxes may still apply. The contribution itself — the money your child put in — can usually be withdrawn anytime without tax or penalty.

When your child reaches the age of majority, the account transfers to them, and they have full control. At that point, you no longer manage the investments or make decisions about the money.

Opening a custodial Roth IRA and what documents you need

You open a custodial Roth IRA at a bank, brokerage, or credit union that offers them. Common providers include Fidelity, Vanguard, Charles Schwab, and many local banks. Call ahead or check their website to confirm they offer custodial accounts, because not all do.

You will need the child's Social Security number, proof of their earned income (usually a copy of their tax return, W-2, or a letter from their employer), and your own identification. Some institutions also ask for proof of the parent-child relationship, such as a birth certificate. The process usually takes a few days to a week.

Once the account is open, you can contribute money and choose investments. You will receive statements showing the balance and growth. When tax time comes, you may need to file a tax return for your child if their income exceeds the filing threshold, even if no taxes are owed.

Tax reporting and filing requirements

If your child earned income, they may need to file a tax return even if no taxes are owed. The filing threshold depends on their age and type of income — for a dependent child with only W-2 wages, the threshold is usually around $14,000 per year, but this changes annually. Check the IRS website or ask a tax preparer for the current year's threshold.

When you contribute to the custodial Roth IRA, you do not get a tax deduction. The contribution is made with after-tax money. However, the growth inside the account is tax-free, and withdrawals in retirement are tax-free, which is the main benefit of the Roth structure.

You will receive a Form 5498 from the financial institution each year showing the contribution amount. Keep this for your records and for tax filing purposes.

Custodial Roth IRA versus other savings options for minors

A custodial Roth IRA is one way to save for a child's future, but it is not the only option. A 529 plan is designed specifically for education and offers tax-free growth for college expenses. A Uniform Transfers to Minors Act (UTMA) account or Uniform Gifts to Minors Act (UGMA) account is a general investment account with fewer restrictions but also no tax advantages. A regular savings account earns interest but no tax benefits.

The custodial Roth IRA makes sense if your child has earned income and you want to encourage long-term retirement saving. The money grows tax-free for decades, and your child learns about investing early. It does not make sense if your child has no earned income or if you need the money for near-term expenses like education.

You can use more than one account type. For example, you might open a custodial Roth IRA with your child's summer job earnings and a 529 plan with money from relatives for college.

Frequently Asked Questions

Can my child withdraw money from a custodial Roth IRA before age 59½?

Yes, but usually with taxes and penalties. The contribution itself can come out anytime tax-free. Earnings withdrawn before age 59½ are taxed as income and subject to a 10% penalty, unless an exception applies — such as a first-time home purchase or may have access to education expenses. Even with an exception, taxes may still be owed.

What happens to the custodial Roth IRA when my child turns 18?

The account does not automatically close or transfer. It becomes your child's to control. You should work with the financial institution to update the account registration so your child can make decisions and access statements. Some institutions require a formal handoff; others do it automatically.

Can I contribute more than my child earned that year?

No. The IRS limits contributions to the lesser of the annual Roth IRA limit or the child's earned income for that year. If your child earned $2,000, you can contribute at most $2,000, even if you have extra money to invest.

Does a custodial Roth IRA affect financial aid for college?

Yes, it may reduce the amount of aid your child is offered. Custodial accounts are considered the child's asset on the Free Application for Federal Student Aid (FAFSA), which can lower aid may be able to access. A 529 plan owned by the parent has less impact on aid. Discuss this with a financial planner if college aid is a concern.

What if my child never works again after opening the account?

The money stays in the account and continues to grow tax-free. Your child can leave it untouched until retirement, or they can withdraw the contribution anytime without penalty. The earnings portion remains subject to tax and penalty if withdrawn before age 59½, unless an exception applies.