Roth IRA for Kids: The Benefits & How to Open One

Family Finance • 6 min read

A Roth IRA is one of the best ways to save for retirement. Common knowledge suggests that the account’s primary purpose (retirement) means it is only suitable for adults who have retirement in sight. Think again.

Yes, a Roth IRA is an excellent avenue for adults to save for retirement. However, it is also an incredibly powerful tool for children because their tax burden is as low as it will ever be, and it sets the stage for sound financial management into the future.

What Types of IRAs Can You Open for a Child?

The two main types of IRAs that you can open for your child are the Roth IRA and the Traditional IRA.

Traditional IRA

A traditional IRA is funded with pre-tax dollars. The contributions and earnings are tax-deferred, meaning all withdrawals are taxed at the individual’s marginal tax rate at the time of withdrawal. A tax-deferred retirement account is ideal for someone who believes their tax rate will be lower in retirement than it is at funding.

Roth IRA

Unlike a traditional IRA, you fund a Roth IRA with post-tax dollars. Since you’ve already paid taxes on the income that funds the account, your contributions are tax-free, and if you follow the requirements, all earnings and qualified withdrawals can be tax-free as well. As a result, the Roth IRA is ideal for investors who believe they are in a lower tax bracket when funding the account than they will be at the time of withdrawal.

Traditional vs. Roth IRA: Which is Better for My Child?

Children tend to have little taxable income and are therefore in the lowest of tax brackets. In fact, they may not even be required to file a return and report their income.

Because you fund a Roth IRA with after-tax dollars, we believe it is almost always the best option for children with income.

Since your child will likely be in a low tax bracket now and will likely be in a higher tax bracket when they withdraw funds at retirement, the Roth IRA provides an amazing opportunity to jumpstart savings in a tax-efficient manner.

How to Open a Roth IRA for Kids

Opening a Roth IRA for your child can be done by you, with or without your child. However, since the individual opening the account must be 18 or older, you’ll need to lend a hand to establish their account.

Because your child is not old enough to open the account solely in their name, the account that you open will be a custodial Roth IRA. This can sometimes also be known as a guardian Roth IRA. You will open the account in your child’s name by providing their information, such as their legal name, address, social security number, and date of birth.

As the custodian, you will be responsible for controlling the assets within your child’s Roth IRA. You will make decisions such as choosing individual investments, naming beneficiaries, and similar administrative tasks.

Can Parents Contribute to a Roth IRA For a Child?

Yes! Parents can contribute to a Roth IRA for a child. The parent will need to ensure that their contribution does not exceed the lesser of:

• A) the child’s earned income for the year OR
• B) the annual contribution limit of $7,000 for 2025.

Can Grandparents Gift a Roth IRA to Their Grandchild?

Absolutely. Just as with contributions to a child’s Roth IRA from a parent, the contribution cannot exceed the lesser of A) their earned income for the year or B) the annual contribution limit of $7,000 for 2025.

The grandparent can take three different approaches to gift a Roth IRA to their grandchild:

1. Establish a custodial Roth IRA account for their grandchild and fund it directly;
2. Gift the child the money to contribute to an already established Roth IRA in the grandchild’s name;
3. Name the grandchild as the beneficiary of a Roth IRA that already exists in the grandparent’s name.

How to Fund a Roth IRA for Kids

Funding a Roth IRA for kids is easy. Once you’ve established the account, you will be able to transfer funds from your funding account (usually a personal checking or savings account) to the brokerage that manages the Roth IRA. From there, you can choose the investments you’d like to invest the funds in or add to an existing investment.

Investment Strategies to Consider

We’ll always suggest speaking with a Financial Advisor to determine your investment strategy. However, we feel low cost index funds can be a good choice when investing the funds within a Roth IRA for kids. These funds track the broad markets while keeping fees low to help allow your child to accumulate more money in their Roth IRA.

Your child has a long investment period ahead of them. A simple investing strategy will also allow you to teach your child about investing more easily.

Other Rules of Roth IRAs for Children

The rules of Roth IRAs for kids will mimic those of Roth IRAs for adults. The IRS does not pay any mind to the account owner’s age; the primary requirement is that the account owner has earned income and does not over-contribute.

For 2025, the maximum contribution to an IRA is $7,000. One exception is individuals over 50, as their limit is $8,000 for catch-up contributions.

The only other requirement is that the child earned income during the tax year they contribute to their Roth IRA.

If the child has earned less than $7,000, they can only contribute up to the amount they’ve earned. However, if they have earned over $7,000, they can contribute the full limit of $7,000.

What Age Can You Start a Roth IRA?

It makes sense to wonder at what age you can start a Roth IRA. Given that this is a retirement account, you would expect some sort of minimum age for a Roth IRA.

Currently, the IRS has no minimum age limits for IRA contributions. The requirement, instead, is that the individual must have earned income in the same year that they make the contributions to the account.

Earned income for children can be a complex subject, so let’s break it down.

Qualified Earned Income for a Roth IRA for Kids

Let’s dive into the earned income component, as that can be a bit tricky.

For a child’s earnings to be considered “qualified,” they must be able to show their income. Income can come from a W2 job, self-employment such as dog walking or lawn mowing, or 1099 contract work. Keep in mind that the IRS does not consider investment income to be earned income.

To qualify, the child must earn their income in the tax year they make contributions. It does not matter what the child does with their money. They don’t need to put those specific dollars into their IRA. They just need to have earned as much money (or more) as is being contributed to their Roth IRA by them or on their behalf.

Depending on your situation, your child may earn income in many ways. For small business owners, there are opportunities to bring their children into the fray of their work.

Even the youngest of children can earn an income! Suppose you have a social media or digital marketing campaign for your business. In that case, you might consider hiring your child to perform as a model rather than paying for stock images of unknown people from an unknown website.

If your child wants to earn income to fund their Roth IRA, they can do side jobs for neighbors, such as yard work or helping with household tasks. There doesn’t necessarily need to be a traditional paper trail like a W2 or 1099, but encourage your child to create invoices and keep receipts. Not only will this further justify the income in the event of questions from the IRS, but it will also help them learn about business practices.

Using Roth IRAs for More Than Just Retirement

One of the great benefits of Roth IRAs (for kids or otherwise) is that your child can use the account for more than just retirement.

Yes, their primary purpose is to serve as an investment vehicle for retirement. However, several exceptions exist that are helpful to be aware of, especially when considering the custodial Roth IRA for a child.

Educational Expenses

The penalty does not apply to distributions used for educational expenses, so long as the expenses are qualified under IRS rules. This exemption can raise the idea of using a Roth IRA instead of a 529 Plan for college savings. This becomes a complex topic that is very situational but worth consideration.

Medical Insurance and Expenses

Another exception exists if you have lost your job and incur medical insurance or medical expenses for yourself, your spouse, or any dependents that you claim. There are several conditions the IRS requires to be met to avoid the 10% additional tax.

Buying a House

Roth IRA owners can withdraw up to $10,000 in earnings to buy a first home. Keep in mind that this is per Roth IRA account and not per Roth IRA owner. If you (or your child) and a spouse both have Roth IRAs, they are both able to withdraw up to $10,000 to fund the purchase of their first home.

Emergencies

In the event of a qualified disaster, some benefits may apply that eliminate the penalties of taking distributions from a Roth IRA to recover. As we saw after Hurricane Katrina and during the Covid-19 pandemic, the IRS tends to announce disaster-related relief after the named disaster. Specific benefits and eligibility requirements usually vary depending on the nature of the disaster, but it helps to know that access has been made easier during troubling times.

Final Thoughts

The ability to begin investing early and benefit from compounding interest will provide your child with a strong head start on their financial future. A Roth IRA for children can serve as a long-term investment account, impart financial literacy, help with future educational expenses or buy a home down the road.

Using Roth Wizards to track your child’s earned income makes it easy to document their work and ensure you have proper records for contributing to their Roth IRA. Our platform helps you stay organized and IRS-compliant while building your child’s financial future.