Custodial Roth IRA: How To Build Your Child’s Financial Future
Written by
Andrew Lisa
Edited by
Nupur Gambhir
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A custodial Roth IRA is a retirement account for minors with earned income, managed by an adult until the child reaches adulthood. Although the IRS imposes income restrictions on Roth IRAs, there is no minimum age requirement to open one, provided the account holder earns income and has a guardian of legal age willing to manage it.
Aside from the flexibility and tax-free growth that all Roth IRA account holders enjoy, minors with custodial Roth accounts get heaping doses of every investor’s most powerful tool — time. With decades of tax-free compounding in front of them, even the most modest contributions can grow into mighty sums by the time they need to tap their accounts.
Keep the following key features of custodial Roth IRAs in mind as you read this article, which outlines all the details.
- They’re available to minors with earned income.
- Contributions are made with after-tax dollars.
- Your money grows tax-free and qualified withdrawals are tax-free.
- A custodian manages the account until the minor reaches age 18 or 21, depending on the state.
- You can tap contributions — but not investment gains — at any age without penalty.
Why Custodial Accounts are Beneficial for Kids
Here’s why even modest contributions can give children an enormous head start in saving for retirement.
- Decades of compounding: Starting at 15 or 16 gives the minor 45 years or more of tax-free growth and compounding before retirement.
- Financial education: Children learn valuable, lifelong lessons about saving and investing at an early age.
- Flexible use later in life: Contributions can help with emergencies, college, or even a first home purchase.
How a Custodial Roth IRA Works
Before opening a custodial Roth IRA, it’s essential to understand four key points.
Eligibility Requirements
The child must have earned income, including wages or self-employment income, from activities such as babysitting or mowing lawns. There’s no minimum age requirement — even toddlers can have a custodial Roth IRA if they have verifiable income. Contribution limits follow standard Roth IRA rules: The lesser of $7,000 for 2025 or the total earned income.
Custodian Responsibilities
The adult opens and manages the account, makes investment decisions and handles all necessary paperwork. The account transfers to the child’s name at the “age of majority,” which is either 18 or 21, depending on the state.
Withdrawals and Tax Rules
Contributions can be withdrawn at any age without tax or penalty. Investment gains are subject to the standard rules for Roth IRA withdrawals. There’s no tax or penalty if the withdrawal is made after age 59½ and the account has been open for at least five years.
How to Open a Custodial Roth IRA (5 Easy Steps)
Follow these five steps to open a custodial Roth IRA for a minor.
- Confirm your child’s eligibility: Make sure they have verifiable earned income. Keep meticulous records of documents like pay stubs and invoices.
- Choose a provider: Look for no account minimum, low or no maintenance fees, good customer support and educational tools (Fidelity, Charles Schwab, Vanguard are common picks)
- Gather required information: You’ll need your and your child’s Social Security numbers, your child’s income documentation and basic personal details, including address, Social Security number and birth date.
- Open and fund the account: Complete the application online. Parents can fund the account on behalf of the child, but total contributions can’t exceed the child’s earned income.
- Pick long-term investments: Index funds, ETFs, and target-date funds are simple, diversified and cost-effective choices.
Best Investments for a Custodial Roth IRA
Only you and your financial professional can determine the best investments for your custodial Roth IRA. However, the unique nature of these kinds of accounts makes the following options a good place to start.
- Index funds and ETFs: Exchange-traded funds, index funds and, the best of both worlds, index ETFs, offer low-cost access to broad market exposure. For example, funds that track the benchmark S&P 500 index buy you slivers of the 500 largest U.S. companies with a single or even partial share.
- Target-date retirement funds: Automatically adjust to changes in your risk tolerance over time.
- Fractional shares: Many brokers allow you to purchase small portions of stocks based on whatever dollar amount you have to invest, which offers easy access to children and other beginners.
Quick Tip:
Because this money won’t be needed for decades, growth-focused investments like stock index funds make sense for most custodial Roth IRAs.
Custodial Roth IRA Rules Parents Should Know
Since parents open and manage the fund until the minor turns 18 or 21, it’s their responsibility to know and adhere to the following rules.
- Contribution tracking: Parents can gift money, but total contributions must not exceed the child’s earned income.
- Recordkeeping: Keep tax records of the child’s earned income in case of IRS questions.
- Ownership transfer: Account control automatically shifts to the child at your state’s age of majority.
Pros and Cons of a Custodial Roth IRA
Examine the benefits and drawbacks of custodial Roth IRAs before you decide to open one.
Pros
- Tax-free growth and withdrawals
- Decades of compounding potential
- Contributions can be withdrawn anytime for emergencies
- Helps teach financial literacy
Cons
- Locks up money for long-term use (earnings are hard to access early)
- Child gains full control at adulthood, even if they’re not financially responsible
FAQ
Here are the answers to some of the most frequently asked questions about custodial Roth IRAs.- Can I open a Roth IRA for my child with no income?
- No, a child must have earned income to qualify for a custodial Roth IRA. The income must come from work, such as babysitting, acting or part-time jobs.
- What happens to the custodial Roth IRA account when my child becomes an adult?
- Once the child reaches the age of majority -- either 18 or 21, depending on the state -- the custodial Roth IRA transitions to a standard Roth IRA. At this point, the child gains full control over the account and can make investment and withdrawal decisions independently.
- Can my child contribute to their Roth IRA on their own?
- Yes, if the child has earned income, they can contribute up to the IRS limit or 100% of their earnings, whichever is lower.
- Is there a difference between a custodial Roth IRA and a regular custodial account?
- Yes, a custodial Roth IRA is specifically for retirement savings and follows tax-advantaged rules. A regular custodial account allows for more flexible savings but does not offer tax-free growth or withdrawal benefits.
