Kids Can Have a Roth IRA — Here’s How

By Lisa Anderson · September 7, 2024

Why This Question Changes Everything for Your Child’s Financial Future

Yes, can kids have a Roth IRA — and when done right, it’s one of the most powerful, underused tools in modern parenting. Unlike generic savings accounts or college funds that get taxed or restricted, a custodial Roth IRA lets a child’s early earnings grow completely tax-free for life — and they can withdraw contributions anytime, penalty-free. Yet fewer than 0.3% of U.S. teens hold retirement accounts, despite the fact that a $2,000 annual contribution starting at age 15 could grow to over $500,000 by age 65 (assuming a conservative 7% average annual return). This isn’t about pushing kids into adulthood early — it’s about giving them tangible ownership of money, demystifying investing, and planting a seed that compounds not just dollars, but confidence.

What the IRS Actually Requires (and What It Doesn’t)

The biggest misconception? That age alone disqualifies a child. In reality, the IRS sets only two hard requirements for a custodial Roth IRA: (1) the child must have earned income, and (2) a parent or legal guardian must serve as custodian until the child reaches the state’s age of majority (typically 18–21). Unearned income — like gifts, allowances, or investment dividends — doesn’t count. But earned income does, whether it’s $400 from walking dogs, $1,200 from a summer landscaping gig, or $3,500 from freelance graphic design work your 16-year-old built via Fiverr.

According to CPA and financial educator Sarah Chen, who co-authored the AICPA’s Family Finance Toolkit, “The IRS doesn’t care if the child is 7 or 17 — only that the income is documented, reported, and verifiable. We’ve helped families open accounts for kids as young as 9 whose Etsy shop selling handmade bookmarks generated $1,850 in net profit.”

Documentation matters. While the IRS doesn’t require W-2s for informal work, parents should maintain clear records: a simple ledger noting date, client, service, amount paid, and method (cash, Venmo, Zelle), plus bank deposit slips or PayPal transaction summaries. For formal jobs, Form W-2 or 1099-NEC suffices. No minimum hours or employer affiliation is needed — just real economic activity.

How to Set Up a Custodial Roth IRA in Under 20 Minutes

Opening the account is simpler than applying for a library card — but choosing the right provider and investment strategy makes all the difference. Here’s what actually works:

Step 1: Choose a custodial-friendly brokerage. Not all firms allow minors’ accounts. Top performers include Vanguard (low-cost index funds, no minimums for IRAs), Fidelity (free trades, robust educational tools), and Charles Schwab (excellent mobile app, no-fee custodial IRAs). Avoid platforms that charge annual maintenance fees or restrict fractional shares — your child may start with just $500.
Step 2: Gather documentation. You’ll need your ID, your child’s Social Security number, proof of address, and — critically — documentation of earned income (see above). Some brokers let you upload PDFs; others require mailed forms.
Step 3: Fund the account — and match it. Contributions are limited to the lesser of $7,000 (2024 limit) or your child’s total earned income for the year. So if your 13-year-old earned $2,450 mowing lawns, max contribution = $2,450. Many parents choose to match dollar-for-dollar — turning it into a powerful teachable moment about saving discipline.
Step 4: Choose investments wisely. Resist the urge to pick ‘fun’ stocks. For long horizons (40+ years), low-cost, diversified index funds win. Vanguard’s Target Retirement 2070 Fund (VTWRX) — designed for investors retiring around 2070 — automatically adjusts its stock/bond mix and charges just 0.08% annually. Fidelity’s FITLX offers similar glide-path logic. These aren’t ‘set-and-forget’ — they’re ‘set-and-learn,’ with quarterly statements your child can review alongside you.

Real-world example: The Rivera family opened a custodial Roth IRA for their daughter Maya at age 14 after she earned $3,200 tutoring middle-schoolers. Her dad matched her contribution, adding another $3,200. She chose VTWRX. By age 18, her account had grown to $7,120 — not from market magic, but from consistent contributions, compound growth, and zero taxes on gains. More importantly, Maya now manages her own budget, reads quarterly fund reports, and recently helped her younger brother open his own account.

Tax & Legal Safeguards Every Parent Must Know

A custodial Roth IRA isn’t just smart — it’s legally protected. Once funded, those assets belong solely to the child. You, as custodian, manage the account, but you cannot withdraw funds for your own use — even for emergencies. Doing so violates fiduciary duty and risks IRS penalties and civil liability. As certified financial planner Dr. Lena Torres (CFP®, CFA), who advises the National Association of Personal Financial Advisors on youth finance, explains: “The custodial structure exists to protect the minor — not convenience the parent. If you need liquidity, use your own emergency fund. This account is your child’s future down payment, not your backup credit line.”

Key safeguards:

No early withdrawal penalties on contributions. Unlike traditional IRAs, Roth contributions (but not earnings) can be withdrawn anytime, tax- and penalty-free. This gives teens real agency — e.g., using $1,000 toward a driver’s ed course or laptop repair — without derailing long-term goals.
Earnings remain locked until age 59½ — with rare exceptions. Qualified withdrawals (contributions + earnings) are tax-free only after age 59½ and if the account is at least 5 years old. Exceptions exist for first-time home purchases (up to $10,000 in earnings) and certain disability/education expenses — but these require documentation and careful planning.
No required minimum distributions (RMDs). Unlike traditional IRAs, Roth IRAs never force withdrawals. This means your child’s money can compound uninterrupted for generations — and even pass tax-free to heirs.

One critical nuance: Once the child reaches the age of majority, the account converts automatically to a standard Roth IRA — and full control transfers to them. There’s no ‘opt-in’ or paperwork. That transition is why financial literacy scaffolding is non-negotiable. Start early: Use the account as a springboard for conversations about risk tolerance, asset allocation, and inflation. Track performance together. Celebrate milestones — like hitting $10,000 — with a family dinner, not just a spreadsheet.

Developmental Benefits Beyond Dollars

This isn’t just finance — it’s developmental psychology in action. According to Dr. Marcus Bell, developmental psychologist and author of Mindful Money Habits, “Children who manage real money — with real stakes and real consequences — develop executive function skills 2.3x faster than peers in theoretical budgeting exercises. Tracking contributions, reviewing statements, and making allocation choices strengthen working memory, impulse control, and future-oriented thinking.”

Case in point: A 2023 longitudinal study published in Child Development followed 187 adolescents aged 13–17 across three years. Those with active custodial Roth IRAs demonstrated significantly higher scores on standardized tests measuring delayed gratification (Marshmallow Test follow-up), financial self-efficacy, and academic persistence — even after controlling for parental income and education level.

Practical integration tips:

Link to chores — but don’t conflate. Allowance ≠ earned income. Instead, create ‘micro-entrepreneurship’ opportunities: “You’ll earn $15/hour for designing our family holiday newsletter” or “$5 per completed dog-walking shift.” Document it. Pay it. Deposit it.
Use visual tracking. Print a simple chart showing contributions, growth, and projected value at ages 30, 45, and 65. Color-code it. Hang it on their bedroom wall.
Make it social. Encourage your child to explain their Roth IRA to grandparents or teachers. Teaching reinforces learning — and builds pride in financial competence.

Feature	Custodial Roth IRA	Traditional Custodial IRA	UTMA/UGMA Account	529 College Plan
Tax treatment of contributions	After-tax (no deduction)	Pretax (deductible)	After-tax (no deduction)	After-tax (state tax deductions vary)
Tax treatment of growth	Tax-free	Tax-deferred (taxed on withdrawal)	Taxable annually (kiddie tax applies)	Tax-free if used for qualified education expenses
Early withdrawal penalties on contributions	None — contributions always accessible	10% penalty + income tax on entire withdrawal	No penalty — but may trigger gift tax if large transfers	10% penalty + income tax on earnings if used non-qualified
Control transfer age	Age of majority (18–21, state-dependent)	Same	Same	No transfer — remains parent-controlled
Best for	Long-term wealth building + financial literacy	High-income teens with significant earned income	Short-term savings with flexible use	College-specific funding only

Frequently Asked Questions

Can my 10-year-old open a Roth IRA if they earned money from selling lemonade?

Yes — absolutely. The IRS doesn’t set a minimum age, only an earned income requirement. If your child operated a lemonade stand, kept sales records (even handwritten), deposited proceeds, and reported the income (on your return, if under filing thresholds), that qualifies. One family in Austin opened an account for their 9-year-old after he earned $1,240 selling hand-painted rocks at a local farmers’ market — with photos, receipts, and Venmo logs as documentation.

What happens if my child stops earning income for a year — do we lose the account?

No. The account remains open and invested indefinitely. Contributions simply pause. Growth continues tax-free. You can resume contributions the next year they earn income — even if it’s years later. Think of it like a dormant savings engine waiting for fuel.

Can I contribute to my child’s Roth IRA using my own money?

No — contributions must be tied to the child’s earned income. However, you can gift money to your child, and they can contribute it — but only up to the amount they actually earned that year. Example: If your 15-year-old earned $1,800, you can give them $1,800 to deposit — but not $3,000. Overfunding triggers IRS penalties and requires corrective distribution.

Does this affect financial aid for college?

No — custodial Roth IRAs are excluded from FAFSA and CSS Profile calculations. Retirement accounts (including custodial ones) are not reportable assets. This is a major advantage over UTMA/UGMA accounts, which count fully against aid eligibility.

What if my child wants to withdraw money for something non-retirement — like a car or trip?

They can withdraw contributions anytime, tax- and penalty-free. Earnings are off-limits before age 59½ unless for a first-time home purchase ($10,000 lifetime cap) or qualified education expenses (though 529s are better for that). We recommend setting family agreements upfront — e.g., “You may withdraw up to 50% of contributions for transportation needs after age 16, with our joint approval.”

Common Myths

Myth #1: “Kids can’t handle investing — it’s too complex.”
Reality: Complexity is scaffolded. Start with one fund. Review statements quarterly. Use apps like Fidelity Youth Account that offer simplified dashboards and educational badges. A 2022 FINRA Foundation survey found 82% of teens with custodial IRAs understood core concepts like compound interest better than peers without — not because they’re geniuses, but because they had skin in the game.

Myth #2: “It’s not worth it unless you contribute big sums.”
Reality: Small, consistent contributions dominate. A $100/month investment starting at age 12 grows to $342,000 by age 65 (7% return). Waiting until age 25 cuts that to $184,000 — a $158,000 loss in potential growth. Time, not size, is the superpower.

Your Next Step Starts Today — Not When They Turn 18

Can kids have a Roth IRA? Yes — and the earlier you begin, the more profound the impact. This isn’t about creating miniature Wall Street traders. It’s about giving your child an irreplaceable advantage: the visceral understanding that money, when guided with intention, multiplies quietly and powerfully over time. It builds resilience, responsibility, and quiet confidence that no test score can measure. So this week, sit down with your child and ask: “What skill could you turn into income?” Then help them document it, earn it, and invest it — not for tomorrow, but for the life they’ll build decades from now. Your move isn’t to wait. It’s to open the account, make the first deposit, and hand them the statement. The rest? Compounds on its own.