How a Custodial Roth IRA Works for Your Child

A custodial Roth IRA is a retirement account opened and managed by a parent or guardian on behalf of a minor child, using the child's earned income as the funding source.

The account follows all standard Roth IRA rules—tax-free growth, tax-free withdrawals in retirement, no required distributions during the account holder's lifetime. The difference is that a parent or guardian controls the account until the child reaches the age of majority (18 or 21, depending on your state), at which point the child takes full ownership and control.

The account must be funded with earned income—money the child actually earned from work. This is the critical requirement. A child cannot fund a Roth IRA with allowance, gifts, or investment returns. The child must have a job: babysitting, lawn care, part-time employment, or self-employment income all count. The contribution limit for 2024 is the lesser of the child's total earned income for the year or $7,000 (this limit changes annually).

A custodial Roth IRA is opened at a brokerage or bank in the child's name, with the parent listed as custodian. The parent makes deposits, chooses investments, and handles account maintenance. The child cannot make withdrawals or direct investment decisions while the account is custodial.

Key Takeaways

• A custodial Roth IRA must be funded with money the child earned from actual work, not gifts or allowance.
• The parent or guardian controls the account and makes all investment decisions until the child reaches age of majority.
• Money grows tax-free and can be withdrawn tax-free in retirement, just like a regular Roth IRA.
• The annual contribution limit is the lesser of the child's earned income or $7,000 (as of 2024, subject to annual change).
• Once the child reaches age of majority, the account converts to a standard Roth IRA under the child's sole control.

When a Custodial Roth IRA Makes Sense

A custodial Roth IRA is most useful when your child has earned income and you want to build retirement savings while they are in a low tax bracket. Because Roth contributions are made with after-tax dollars, the tax benefit is largest when the child's income is low enough that they owe little or no federal income tax anyway.

A teenager working a summer job or part-time during the school year is the typical scenario. If your 16-year-old earns $3,000 from a retail job, you could contribute up to $3,000 to their custodial Roth IRA. That money grows tax-free for 50 years before they touch it. By contrast, if you simply gave them the money as a gift, any investment gains would be taxed each year (or taxed to you if the child is under 18, under the "kiddie tax" rules).

A custodial Roth also teaches the child about retirement savings and compound growth. The account is in their name, so they see the balance grow and understand the connection between work and long-term wealth building.

How to Open and Fund a Custodial Roth IRA

You open a custodial Roth IRA at any brokerage or bank that offers them—Fidelity, Vanguard, Charles Schwab, and most other major firms do. You will need the child's Social Security number, proof of the child's identity, and proof of your identity as the parent or legal guardian.

The account application will ask for the child's earned income for the year. This is where documentation matters. If your child works for an employer, a W-2 form or recent pay stub proves the income. If your child is self-employed (babysitting, lawn care, freelance work), you should keep records of the income—invoices, payment records, or a simple ledger showing dates, services, and amounts paid. The IRS does not require you to submit these documents when you open the account, but you must have them if the IRS ever questions the contribution.

Once the account is open, you fund it by transferring money from your bank account to the custodial Roth IRA. You can do this online, by check, or by wire transfer, depending on the brokerage. The contribution must be made by the tax filing deadline for that year (usually April 15 of the following year) to count toward the prior year's limit.

Investment Choices and Account Management

As the custodian, you choose what the money is invested in—stocks, bonds, mutual funds, exchange-traded funds (ETFs), or money market funds. Most brokerages offer a range of low-cost index funds suitable for long-term growth. Some custodians also allow you to set up automatic monthly contributions if your child has steady income.

The child cannot direct trades or make withdrawals while the account is custodial. You control all decisions. This protects the account from the child spending the money on something else and also keeps the long-term focus intact.

You will receive statements from the brokerage showing the account balance and any gains or losses. There are no annual fees for most custodial Roth IRAs, though some brokerages charge a small fee if the account balance is very low or if you request certain services.

What Happens When Your Child Turns 18 or 21

When your child reaches the age of majority in your state (18 in most states, 21 in a few), the custodial designation ends and the account becomes a standard Roth IRA in the child's name. You no longer have control. The child can now make deposits, direct investments, and request withdrawals (though early withdrawals before age 59½ may be subject to taxes and penalties on earnings, just as with any Roth IRA).

The transition is automatic—you do not need to file paperwork or move the money. The brokerage handles the conversion. At that point, it is a good idea to have a conversation with your child about how the account works, what the long-term goal is, and why leaving the money untouched until retirement is the best strategy.

Contribution Limits and Tax Considerations

The annual contribution limit for a custodial Roth IRA is the lesser of the child's earned income for the year or the standard Roth IRA limit. For 2024, that limit is $7,000. If your child earned only $2,500, you can contribute only $2,500, even though the limit is higher. If your child earned $10,000, you can contribute $7,000.

The contribution itself is not tax-deductible—you are using after-tax money. However, the growth inside the account is never taxed, and withdrawals in retirement are tax-free. This is the core advantage of the Roth structure.

There is no income limit for opening a custodial Roth IRA based on the child's income. A child earning $50,000 from a job can still open one. However, if the child also has unearned income (dividends, interest, capital gains), that unearned income may be subject to the "kiddie tax," which taxes it at the parent's rate. This does not affect the Roth IRA itself, but it is worth understanding if your child has investment income.

Withdrawal Rules and Early Access

Once the account is custodial, the child cannot withdraw money without your permission. This is by design—it prevents the child from raiding the account for a car or college spending money.

After the child reaches age of majority and the account converts to a standard Roth IRA, the withdrawal rules change. The child can withdraw contributions (the money you put in) at any time, tax-free and penalty-free. Withdrawals of earnings (investment gains) before age 59½ are generally subject to income tax and a 10% penalty, with limited exceptions for first-time home purchases (up to $10,000 lifetime) and certain other circumstances.

If the child needs money for college, a 529 plan or a standard savings account may be a better choice than a Roth IRA, since the Roth is designed for retirement and early withdrawals of earnings carry tax consequences.

Custodial Roth IRA vs. Other Savings Options

A custodial Roth IRA is not the only way to save for a child. A 529 college savings plan offers tax-free growth for education expenses. A Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) account allows you to invest gifts in the child's name with more flexibility but no tax-free growth structure. A standard taxable brokerage account in the child's name offers complete flexibility but no tax advantages.

The custodial Roth IRA is best when your goal is long-term retirement savings, your child has earned income, and you want to lock in tax-free growth while the child is in a low tax bracket. It is not suitable if you think the child will need the money before retirement or if the child has no earned income.

Frequently Asked Questions

Can I contribute to a custodial Roth IRA if my child does not have a job?

No. The child must have earned income from work. Allowance, gifts, or investment returns do not count. If your child is self-employed (babysitting, lawn care, tutoring), that income counts as long as you can document it.

What happens to the custodial Roth IRA if I die before my child reaches age of majority?

The account passes to your estate or to a named beneficiary, depending on how you set it up. A guardian or executor can continue to manage it until your child reaches age of majority. Consult your estate planning attorney about how to structure this.

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

While the account is custodial, only you can withdraw money, and doing so defeats the purpose. After the child reaches age of majority and takes control, they can withdraw contributions tax-free but withdrawals of earnings before 59½ are taxed and penalized unless an exception applies.

Does opening a custodial Roth IRA affect my child's financial aid for college?

Yes. Custodial Roth IRAs are counted as parental assets on the FAFSA (Free Application for Federal Student Aid) and reduce the child's financial aid. A 529 plan has a similar effect. If college aid is a concern, speak with a financial aid advisor before opening the account.

Can I change the investments in the custodial Roth IRA without asking my child?

Yes. As custodian, you have full control over investment decisions. You can buy, sell, or rebalance holdings as you see fit. Once your child reaches age of majority and takes control, they can make their own investment choices.