Custodial Roth IRA for Kids: The Most Powerful Retirement Tool Most Parents Haven't Used

Your teenager mowed lawns all summer and made $1,200. Most parents open a savings account and call it a financial win. That’s not a bad move. But there’s a move that is exponentially better—one that most parents have never heard of and almost none actually use.

A custodial Roth IRA lets you invest your child’s earned income in a tax-advantaged retirement account that compounds for 55+ years completely tax-free. By the time your 10-year-old turns 65, a single $1,000 contribution today could be worth $117,000 or more. A teenager who maxes out their Roth IRA for five summers before college—even if they never contribute again—can arrive at retirement with hundreds of thousands of dollars they earned by age 18.

Key Takeaways

• Any child with earned income—from babysitting, lawn care, modeling jobs, or a W-2 position—qualifies to contribute to a Roth IRA.
• The 2026 contribution limit is the lesser of $7,000 or the child’s actual earned income for the year.
• Fidelity and Charles Schwab both offer custodial Roth IRAs with no account minimum and no annual fees—the barrier to opening one is essentially zero.
• Growth is entirely tax-free: contributions come from after-tax dollars, and qualified withdrawals in retirement are not taxed at all.
• Contributions (not earnings) can be withdrawn at any time without penalty—making the Roth IRA more flexible than most parents realize for a 25-year-old who needs money.

Who Qualifies and What Counts as Earned Income

The IRS rule is straightforward: to contribute to any IRA, you must have earned income—defined as wages, salaries, tips, and net self-employment income. Passive income (interest, dividends, gifts) does not count.

For children, qualifying earned income includes:

• W-2 employment: Any job where taxes are withheld—a restaurant, retail store, or camp counselor position.
• Self-employment income: Babysitting, lawn mowing, tutoring, pet sitting, and other independent work all qualify. The child must keep records of their earnings. If net self-employment income exceeds $400 in a year, they’ll also owe self-employment tax.
• Modeling and performance income: Payments to child performers and models count as earned income and qualify.
• Household employment: If a parent pays a child for legitimate work in a family business, that income qualifies—but the IRS scrutinizes family employment arrangements, so the work and compensation must be real and documented.

What doesn’t qualify: an allowance paid without any services rendered, gifts from grandparents, money from selling personal items.

The Contribution Limits and the Key Rule

For 2026, the Roth IRA contribution limit is $7,000 per year. But for a child who earns less than $7,000, the limit is their actual earned income. A 13-year-old who earns $800 babysitting can contribute up to $800. A 16-year-old with a part-time retail job earning $4,200 can contribute up to $4,200.

The parent can make the contribution on the child’s behalf. This is one of the most valuable features: the child doesn’t have to contribute their own money. The parent or grandparent can deposit the full amount of the child’s earned income into the account, while the child keeps their cash. The IRS cares only that the contribution doesn’t exceed earned income—not where the dollars physically come from.

The Math: Why Starting at 10 Is Radically Different from Starting at 25

At 7% average annual return (the approximate historical real return of a broad U.S. stock market index after inflation), here’s what different contribution levels produce by retirement at age 65:

Contribution	Age Started	Years to Grow	Final Value at 65 (7% return)	Tax Treatment
$1,000 one-time	Age 10	55 years	~$117,000	Tax-free
$1,000 one-time	Age 18	47 years	~$64,000	Tax-free
$1,000 one-time	Age 25	40 years	~$15,000	Taxable (if traditional 401k)
$5,000/year for 5 years	Ages 14–18	47–51 years	~$500,000+	Tax-free
$7,000 max one year	Age 16	49 years	~$200,000	Tax-free

Calculations use compound interest at 7% annual return, compounded annually. For illustration only; actual returns vary.

The single most important variable in these projections is not how much is contributed—it’s the starting age. Eight additional years of compounding on a $1,000 investment produces $53,000 in additional wealth. That gap between starting at 10 versus starting at 18 exceeds the total contribution by 53 times.

How to Open a Custodial Roth IRA

Which Brokerages Offer Them

Not every brokerage offers custodial Roth IRAs, and of those that do, the terms vary significantly:

Brokerage	Minimum to Open	Annual Fees	Investment Options	Notes
Fidelity	$0	None	Stocks, ETFs, mutual funds	Highly recommended for beginners
Charles Schwab	$0	None	Stocks, ETFs, mutual funds	Excellent educational tools
Vanguard	$0 (some funds require minimums)	Low/none	Index funds, ETFs	Slightly less user-friendly
TD Ameritrade (Schwab)	$0	None	Stocks, ETFs, options	Now merged into Schwab

For most families, Fidelity and Schwab are the easiest starting points: no minimums, no fees, and both offer robust customer service for account setup.

The Setup Process

1. Gather documentation: Your ID, your child’s Social Security Number, and evidence of earned income (pay stubs, a self-employment ledger, or bank statements showing deposits from babysitting clients).
2. Open the account: Visit the brokerage’s website, select “Custodial Roth IRA,” and complete the application as the custodian with your child as the beneficiary.
3. Fund the account: Transfer money from your bank account. The contribution is attributed to the child’s earned income for that tax year.
4. Invest the funds: Money sitting in a Roth IRA earns nothing until invested. Choose a target-date fund (e.g., Fidelity Freedom 2070) or a broad index ETF (e.g., FZROX, VTI, or VOO). Target-date funds are one-decision investing—appropriate for accounts that will grow for decades without active management.
5. File correctly: If your child earns more than $14,600 in a year (2026 standard deduction), they’ll need to file a tax return. Most children earning part-time income will owe nothing but should file to document the earned income basis for the Roth contribution.

Custodial Roth IRA vs. Other Savings Vehicles for Kids

Parents often ask how the custodial Roth IRA compares to other accounts.

Account Type	Tax Benefit	What Funds Can Be Used For	Contribution Limit	Requires Earned Income
Custodial Roth IRA	Tax-free growth + withdrawal	Anything after 59½; contributions anytime	$7,000/year (2026)	Yes
529 Plan	Tax-free growth for education	Qualified education expenses only	State-dependent (~$18K/year gift limit)	No
UTMA/UGMA	None (taxed at child’s rate)	Anything once child reaches 18/21	No limit	No
High-yield savings	None (interest taxed)	Anything	No limit	No

The Roth IRA is uniquely powerful for long-term wealth building. The 529 is better for education-specific savings. An UTMA provides flexibility but no tax advantage. All three can be used simultaneously.

What Happens When Your Child Turns 18 (or 21)

A custodial Roth IRA converts to a standard Roth IRA when the child reaches the age of majority in their state—18 in most states, 21 in others. At that point, the account is entirely in the child’s control. You can no longer make decisions about it.

This is worth discussing with your child before it happens. The account’s value—which may be substantial by 18 if contributions started at 10—should remain invested. Withdrawal of earnings before age 59½ triggers taxes and a 10% penalty. Withdrawal of contributions (not earnings) is always penalty-free, which gives the young adult a safety net in emergencies without requiring them to destroy the tax-advantaged structure.

What to Watch For Over 3 Months

Month 1: Open the account and make the first contribution. Even a small amount—$100 or $200—establishes the account and starts the clock. The perfect shouldn’t be the enemy of the good here. An account with $200 in it this year is infinitely better than an account that doesn’t exist yet.

Month 2: Confirm the funds are invested, not just sitting as cash. New brokerage accounts often hold deposits as uninvested cash until the owner takes action. Log in, confirm the balance is in an index fund or target-date fund, and show your child what the account holds and why.

Month 3: Use the account as an ongoing financial education tool. Show your child the account balance quarterly. Discuss what the investment is (a tiny piece of thousands of companies), why it goes up and down, and what the projected value is at retirement. This is the most effective financial education possible—real money, real stakes, real feedback.

Frequently Asked Questions

Can a child contribute to a Roth IRA if they earn money informally—like babysitting?

Yes. Self-employment income counts, including cash paid for babysitting, lawn mowing, and tutoring. The child should keep a simple log of income received (date, client, amount). If total self-employment income exceeds $400 in a year, they’ll need to file a Schedule SE for self-employment tax, but many child earners will fall below this threshold.

What if my child spends their summer earnings before I realize I should have put it in a Roth?

The parent can fund the Roth IRA from their own money, as long as the contribution doesn’t exceed the child’s documented earned income for that tax year. The IRS doesn’t require that the dollars contributed are literally the same dollars the child earned—only that the contribution amount is covered by earned income.

What happens to the Roth IRA if my child doesn’t retire at a traditional age?

The account belongs to your child and grows indefinitely. There are no required minimum distributions for Roth IRAs (unlike traditional IRAs). If your child decides to work past 65 or 70, the account just keeps growing. The longer it grows, the more valuable it becomes.

Is a Roth IRA better than contributing to their 529?

For retirement savings, yes—unambiguously. The Roth IRA has more flexibility, zero restrictions on how the money is ultimately spent, and the same tax-free growth. The 529 is specifically for education expenses and offers state tax deductions in many states, which the Roth does not. If you have money for only one, and your child has earned income, the Roth IRA is often the stronger choice long-term.

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About the author

Ricky Flores is the founder of HiWave Makers and an electrical engineer with 15+ years of experience building consumer technology at Apple, Samsung, and Texas Instruments. He writes about how kids learn to build, think, and create in a tech-saturated world. Read more at hiwavemakers.com.

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Sources

1. Internal Revenue Service. (2026). “Publication 590-A: Contributions to Individual Retirement Arrangements.” IRS. https://www.irs.gov/publications/p590a
2. Internal Revenue Service. (2026). “Roth IRAs.” IRS. https://www.irs.gov/retirement-plans/roth-iras
3. U.S. Securities and Exchange Commission. (2023). “Investor Bulletin: Roth IRAs.” SEC Investor Education. https://www.investor.gov/
4. T. Rowe Price. (2023). “The Power of Starting Retirement Savings Early.” T. Rowe Price Insights. https://www.troweprice.com/
5. Fidelity Investments. (2024). “Custodial IRA Overview.” Fidelity. https://www.fidelity.com/retirement-ira/custodial-ira
6. Vanguard. (2023). “Roth IRA: What It Is, How It Works.” Vanguard Investor Education. https://investor.vanguard.com/