Roth IRA for Kids: How It Works

1. What a Roth IRA for kids actually is

Quick Answer: It is an ordinary Roth IRA opened in a child’s name, with a parent acting as custodian until the child reaches the age of majority. The child is the legal owner from day one, and the tax rules match an adult Roth exactly. Our investing guides cover that version.

Brokerages call it a “custodial Roth IRA.” There is no separate section of the tax code for it. Three facts do most of the work.

• There is no minimum age. The rule is earned income, not birthdays.
• The child owns the money, not you. You decide while you are custodian, but the assets were never yours to reclaim.
• The money does not have to come from the child. The IRS only checks that the child earned at least as much as went in.

That third point surprises most parents. A teenager who earns $4,000 waiting tables can spend every dollar and still have $4,000 put in by a parent or grandparent.

The short walkthrough below covers the same ground before we get into the numbers.

2. The earned income rule: what counts and what doesn’t

Quick Answer: Earned income means wages, salary, tips or net self-employment profit. Allowance, chore money, birthday cash, gifts and investment income do not qualify. Without earned income there is no Roth contribution, which is why a custodial brokerage account is the fallback for younger children.

Self-employment brings paperwork. Once net earnings pass $400 in a year, your child files a return and owes self-employment tax on that profit, even with no income tax due. Keep a simple log of dates, hours and amounts.

3. How much can go in for 2026

Quick Answer: The 2026 cap is the lesser of the child’s earned income or $7,500, per the IRS. Earn $3,000 and you can contribute $3,000. Earn $20,000 and you are still capped at $7,500. Unlike a 529 plan, extra years cannot be front-loaded.

The IRS raised the IRA limit to $7,500 for 2026. For nearly every child, earnings are the binding number, not the cap.

The bottom row is the one to notice: allowance produces the same feeling as a job and none of the contribution room. One deadline is easy to miss, too: a 2026 contribution can still be made up to the 2027 filing deadline.

4. What one teenage year is worth at 65

Quick Answer: A single $7,500 contribution at 15 models to about $220,900 by 65 at a 7% return. The same amount at 30 models to roughly $80,100. Those fifteen extra years are worth more than the money itself. Dollar-cost averaging is how most families get there.

Compounding arguments get waved around without figures. Here are the figures.

Fill five teenage years (ages 15 through 19, $7,500 each) and the model reaches roughly $1.04 million at 65 on $37,500 contributed. Nothing else in the tax code turns that little into that much.

5. Will your child actually owe tax?

Quick Answer: Almost never on the income tax side. A dependent’s standard deduction rises with their wages, up to the $16,100 single figure for 2026. A child earning under that owes no federal income tax, so Roth money goes in at a 0% rate and skips capital gains tax forever.

An adult in the 24% bracket pays full freight on every dollar before it goes in. A 16-year-old usually pays nothing.

Two things sit outside the table. Payroll tax is withheld from most W-2 jobs however small the paycheck. And state tax depends on where you live: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming take nothing from wages, while a teen in California or New York may owe a state filing on a $0 federal bill.

6. Paying your child through your own business

Quick Answer: In a sole proprietorship, or a partnership where every partner is the child’s parent, wages paid to an under-18 child are exempt from Social Security and Medicare tax, and from federal unemployment tax until 21. Structure it as real employment, not a paper transfer.

This is the most powerful and most abused route into a kid’s Roth. The IRS family employees rules set out who gets the break:

• Sole proprietorship, or a partnership owned only by the child’s parents. Wages to a child under 18 escape Social Security and Medicare tax. FUTA does not apply until 21. Income tax withholding still applies at any age.
• An S corporation, a C corporation, or any other partnership. No exemption. Full payroll taxes apply whatever the child’s age.
• Household work in your own home. Different rules again, and this is not a business expense.

Four conditions keep it defensible: the work is genuinely done, the pay matches what a stranger would get, the child is paid on a schedule into their own account, and the wages go on a W-2.

Paying a nine-year-old $7,500 to “help with social media” draws attention. Paying a 16-year-old $12 an hour to file and photograph inventory, with a timesheet behind it, is ordinary employment.

7. How the contribution limit has moved

Quick Answer: The IRA limit went from $5,500 in 2016 to $7,500 in 2026, a 36% rise. Maxing out all eleven years means $68,500 contributed and a modeled balance near $96,300 at 7%. The limit is indexed, so it keeps drifting up.

Parents often assume the cap is fixed. It moves in $500 steps whenever inflation pushes it past the rounding line.

Left alone for another 39 years at 7%, that $96,300 models to roughly $1.35 million: from $68,500 of teenage paychecks.

8. Getting money back out before retirement

Quick Answer: Contributions can come out at any age, tax-free and penalty-free, because that money was already taxed. Earnings are the restricted part: before 59½ they normally face income tax plus a 10% penalty, with exceptions for higher education and up to $10,000 toward a first home.

Locking money away for fifty years sounds severe until you see the order of withdrawal.

1. Contributions come out first. Every dollar contributed can be withdrawn at any time for any reason, with no tax and no penalty.
2. Earnings come out last. Only after the entire contribution base has been withdrawn do you reach the growth.
3. Earnings are tax-free once two tests are met. The account must be at least five years old and the owner at least 59½.
4. Some early uses skip the 10% penalty. The IRS list of exceptions covers qualified higher education costs, up to $10,000 for a first home, disability and several others. Income tax on the earnings can still apply.

So a 22-year-old with $30,000 of contributions and $18,000 of growth can pull the full $30,000 for a down payment with no tax bill. Roth IRAs also carry no required minimum distributions, which is why they pair well with Roth conversions later on.

9. What happens when your child turns 18

Quick Answer: Your role as custodian ends at your state’s age of majority (18 in most states, later in a few) and the account converts to a standard Roth IRA in your child’s sole name. They can then withdraw every contributed dollar, and you cannot stop them.

This is the real risk, and it is the same handover problem a UGMA or UTMA custodial account creates. Two details are worth confirming before you open anything:

• The age is set by state law, and brokerages differ. Most states use 18; a handful use 19 or 21. Ask the provider before funding.
• Financial aid treats the account kindly. Retirement accounts are not reported as FAFSA assets under the 2026–2027 Federal Student Aid Handbook, so the balance does not raise the Student Aid Index. Withdrawals during college are a different matter.

The defense is conversational, not legal. Show your child the balance every year and the handover stops being a cliff edge.

10. Roth IRA for kids vs 529 vs custodial account

Quick Answer: Use a Roth IRA for retirement money, a 529 plan for education money, and a custodial brokerage account for everything else. They are not competitors: each solves a different problem, and the earned income rule decides whether the Roth is even available.

Most families end up with two of the three: a 529 for school and a Roth for the summer job.

11. How to open a Roth IRA for kids, in order

Quick Answer: Five steps: confirm the earned income, pick a broker that offers custodial Roth IRAs with no minimum, open it with both Social Security numbers, contribute up to the earned amount, and invest it in one broad low-cost fund such as an S&P 500 index fund.

1. Confirm and document the earned income first. Get the W-2, or write down the self-employment dates and amounts. This number caps everything else.
2. Choose a broker that offers a custodial Roth IRA. Not every firm does. Screen on account minimum, fund access and fractional shares.
3. Open the account with both Social Security numbers. The child is the owner, you are the custodian. It takes about fifteen minutes online.
4. Contribute up to the lesser of earnings or $7,500. The cash can come from you, a grandparent, or the child’s own paycheck.
5. Invest it in one fund and leave it alone. A broad index fund or a target-date fund is enough. Uninvested cash is the most common mistake we see.

Step five is where families lose the most. Funding the account and never buying anything turns a fifty-year compounding engine into a savings jar.

12. The verdict

Quick Answer: Our pick is to fund a Roth IRA for kids in every year your child has earned income, up to whatever they earned, and invest it in one broad index fund. Skip it entirely in years with no paycheck. DollarVisor ranks nothing by who pays us.

The case for it is clean. Money goes in at a 0% tax rate, grows untaxed for five decades, comes out untaxed, and never counts as a FAFSA asset.

The case against is the handover. At 18 in most states, the account is entirely your child’s and the contributions are theirs to spend. If that worries you more than the tax saving attracts you, a parent-owned 529 keeps control where it is.

Our read: the risk is worth taking. A teenager who has watched a balance grow for four years rarely empties it at nineteen, and waiting until 25 to start costs roughly two-thirds of the final number. Begin in the first year there is a real paycheck. The wider lineup sits in our investing section.

13. Frequently Asked Questions

1. What is the minimum age for a Roth IRA for kids?

There is no minimum age. The requirement is earned income, not a birthday. A child of any age with wages or net self-employment profit can hold one, with a parent named as custodian until the state’s age of majority.

2. How much can a child contribute to a Roth IRA in 2026?

The lesser of their earned income or $7,500, the 2026 IRA limit set by the IRS. A child who earned $2,800 can contribute $2,800; one who earned $25,000 is still capped at $7,500. Unused room does not carry forward.

3. Does babysitting or lawn mowing count as earned income?

Yes. Net profit from babysitting, lawn care, dog walking or tutoring counts. Keep a written record of dates, hours and amounts. Once net self-employment earnings pass $400 for the year, your child must file a return and pay self-employment tax on that profit.

4. What happens to a custodial Roth IRA when my child turns 18?

At your state’s age of majority, usually 18 but later in a few states, custodianship ends and the account becomes a standard Roth IRA in your child’s sole name. They gain full control, including the right to withdraw every contributed dollar tax-free.

This article is information, not financial, tax or legal advice. Rules change and your situation is your own. See our disclaimer.