What to Invest In Inside Your Child’s Roth IRA

Here is the mistake I see mentioned constantly in every parenting-and-money forum I follow: someone opens a custodial Roth IRA for their kid, feels great about it, and then does absolutely nothing with the money inside. It just sits there — in the brokerage’s default settlement fund or money market account — earning somewhere between 0% and a modest yield while the years tick by. If you are researching the best investments for a custodial Roth IRA, the most urgent thing I can tell you is this: an empty or uninvested Roth IRA is almost worse than not having one, because it creates the illusion that you have solved the problem when you have not.

The entire reason a custodial Roth IRA is such a powerful vehicle is tax-free compounding over decades. A child who starts at age 14 has roughly 50 years before traditional retirement age. Fifty years of compounding, completely sheltered from taxes, is extraordinary. However, that math only works if the money is actually invested in something that grows. Cash equivalents waste the shelter entirely. So before I walk you through the specific investment categories that make the most sense inside these accounts, I want you to open your brokerage app right now and confirm your child’s Roth is not sitting in a settlement fund. That single check could be worth tens of thousands of dollars.

Why a Long Time Horizon Changes Everything About Asset Allocation

Standard investment advice tends to suggest getting more conservative as you approach your goal. That logic makes complete sense for a 55-year-old saving for retirement in ten years. It makes almost no sense for a 13-year-old with 50 years ahead of them. In my experience reading the academic literature on long-run equity returns, the historical case for holding equities over multi-decade periods is extremely strong. Bonds and “conservative” allocations have their place — but that place is not inside a child’s Roth IRA, at least not in any significant proportion.

Think about what a Roth IRA actually does: it shelters growth from taxes forever. If you fill that shelter with assets that grow slowly, you are wasting the most valuable real estate in your family’s financial life. The tax-free advantage compounds most dramatically when applied to high-growth assets. As a result, most informed observers — and the broad consensus I have read across sources including Vanguard’s own research and the work of authors like William Bernstein — argue for equity-heavy portfolios for young investors with decades to ride out volatility.

Custodial Roth IRA Investment Options: The Categories That Actually Make Sense

I am deliberately not going to tell you “buy ticker XYZ.” Expense ratios change, funds merge, and what is optimal at the time I write this may not be optimal when you read it. Instead, here are the fund categories I think belong in this conversation — along with what to look for in each.

Total US Stock Market Index Funds

A total US stock market index fund holds essentially every publicly traded US company, weighted by market size. You get large caps, mid caps, and small caps in one fund. Diversification is built in. Expense ratios on these funds from the major brokerages — Fidelity, Vanguard, and Schwab — are often in the range of 0.03% or lower. That near-zero cost is exactly what you want inside a Roth where every dollar of return stays tax-free.

S&P 500 Index Funds

An S&P 500 index fund tracks the 500 largest US companies by market capitalization. It is slightly less diversified than a total market fund — it excludes smaller companies — but it covers roughly 80% of total US market value. Costs are similarly razor-thin at the major providers. Many parents find this category easier to explain to a teenage child, which is a genuinely underrated benefit when you are trying to build financial literacy alongside the account itself.

Total International Stock Index Funds

A total international fund adds exposure to developed and emerging markets outside the US. Whether to include international exposure — and how much — is genuinely debated. However, most broadly diversified portfolio models include some international allocation, typically between 20% and 40% of the equity portion. For a child with a 50-year horizon, the geographic diversification argument is reasonable. Costs here tend to be slightly higher than domestic index funds, but still well under 0.10% at the major brokerages.

Target-Date Funds: Useful, But With an Important Caveat

Target-date funds are “set it and forget it” funds that automatically shift from aggressive to conservative as the target year approaches. For a parent who genuinely does not want to think about rebalancing, a target-date fund dated to the child’s approximate retirement year — say, 2070 or 2075 for a child born today — is a reasonable, if slightly expensive, choice. Expense ratios on target-date funds are typically higher than plain index funds, often in the 0.10%–0.15% range at the lower-cost providers, and considerably higher at others.

Here is the caveat I see people get wrong constantly: some parents pick a near-dated target-date fund by mistake, perhaps a 2030 or 2035 fund, because those are the first ones they see in the list. A 2030 fund is already heavily weighted toward bonds and cash equivalents. That is exactly the conservative allocation I said to avoid for a young child. Always pick the target-date fund that corresponds to the child’s likely retirement year, not the nearest available date.

What Are the Best Mutual Funds for Kids’ Roth IRAs? The Expense Ratio Math You Need to See

When people ask me what are the best mutual funds for kids’ Roth IRAs, my first answer is always: the cheapest ones in the right category. Here is a worked example that makes the cost difference concrete.

Assume $3,000 invested at age 15, growing at a hypothetical 7% annual return over 50 years, with no additional contributions. At 0.03% annual expense ratio, the ending value is approximately $84,200. At 0.75% annual expense ratio — common in actively managed funds — the ending value drops to approximately $57,800. That is a difference of more than $26,000 on a single $3,000 contribution, paid entirely to the fund company in fees. Inside a Roth IRA, where growth is tax-free, you feel that drag acutely. Every dollar in fees is a dollar of tax-free compounding you gave away permanently.

Always check the current expense ratio directly. Fund companies can and do change fees. The fund’s fact sheet or the brokerage’s fund detail page will show the current expense ratio. Do not rely on a number you read in an article — including this one.

Best Way to Invest Money in a Custodial Roth IRA for a 16-Year-Old (Including the Tax-Free Switch Most People Miss)

A common question I see asked in Roth IRA communities goes roughly like this: “My 16-year-old has a Roth IRA and it’s sitting in an actively managed large-cap growth fund with a 0.75% expense ratio. Can I switch it to an index fund without paying taxes?”

The answer is yes — and this is the key fact most people do not know. Selling one fund and buying another inside a Roth IRA is not a taxable event. The IRS does not tax transactions within a Roth. You can sell the expensive actively managed fund, buy a low-cost index fund in its place, and owe exactly zero in capital gains tax on that exchange. The tax-free treatment applies to growth and withdrawals in retirement, and it also applies to internal trades within the account.

This is one of the most liberating features of any IRA. In a taxable brokerage account, switching funds triggers a capital gains event if the position has grown. Inside a Roth, you can rebalance, switch fund families, or move from an expensive fund to a cheap one without any tax consequence at all. So if your teenager’s Roth is sitting in something expensive and mediocre, switching it is not only allowed — it is straightforward and free of tax complexity.

A Note on Fund Minimums and ETFs

Mutual fund minimums can be an obstacle with small custodial Roth balances. Some Vanguard mutual funds, for example, have historically required $1,000 or $3,000 minimums. Fidelity has eliminated minimums on its own index mutual funds entirely. Schwab’s index mutual funds generally require $1 minimums. If minimums are a problem at your brokerage, ETFs are the straightforward solution. The ETF version of nearly every major index fund trades like a stock — no minimum beyond the price of one share — and often carries an identical or near-identical expense ratio to its mutual fund counterpart. Confirm current minimums directly with your brokerage, as these figures change.

Best Funds for a Kid’s Roth IRA: Quick-Reference Summary

Fund Category	Typical Expense Ratio Range	Best For	Watch Out For
Total US Stock Market Index	0.03%–0.06%	Core equity holding, maximum diversification	Excludes international exposure
S&P 500 Index	0.03%–0.05%	Large-cap US exposure, simplicity	Skews toward largest companies only
Total International Index	0.07%–0.12%	Geographic diversification complement	Currency and political risk
Target-Date Fund (far-dated)	0.10%–0.15% (low-cost providers)	Hands-off, auto-rebalancing	Must choose correct retirement year; costs vary widely
Actively Managed Funds	0.50%–1.25%+	Generally not recommended here	High fees compound negatively over 50 years

Contribution Rules, Earned Income, and What You Need to Know Right Now

Before we go further: a custodial Roth IRA requires the child to have earned income. The contribution cannot exceed what the child actually earned that year. Babysitting income, lawn-mowing income, a W-2 from a part-time job — all of these count. Gifts and allowances do not. You, as the parent, can contribute on the child’s behalf up to the amount they earned, but the Roth contribution limit still applies as a ceiling.

For the 2026 tax year, the Roth IRA contribution limit is $7,500 (or 100% of earned income, whichever is lower). However, I want to be direct: contribution limits are adjusted periodically by the IRS, and a stale number in an article is the most common way people make avoidable mistakes. Please confirm the current limit at irs.gov before contributing. The IRS publishes updated figures each fall for the following tax year.

Also worth noting: custodial accounts — whether Roth IRAs or UTMA/UGMA accounts — transfer to the child at the age of majority, which is 18 in most states and 21 in others. Your child will eventually control this account entirely. That is actually a feature, not a bug, if you are also building financial literacy alongside the account.

A Resource Worth Adding to Your Reading List

If you are navigating custodial accounts more broadly — including the differences between UTMA accounts, UGMA accounts, and Roth IRAs for minors — I have found it genuinely useful to have a single clear reference that explains the full landscape. Custodial Accounts for Kids (UTMA and UGMA): The Complete Beginner’s Guide (currently $6.48) does exactly that. It covers the flexible, taxable custodial account options that exist beyond a 529 plan, which matters if you are trying to understand how a Roth IRA for a minor fits into the broader picture of accounts available to families. It is a fast, clear read — the kind of thing I wish had existed when I was first sorting out these account types for my own kids.

As a complementary resource, The Parent’s Guide to Custodial Accounts takes a more step-by-step approach to the mechanics of opening, funding, and managing accounts. If you are earlier in the process and still figuring out which type of account to open, that one is worth a look alongside the Roth IRA-specific research you are doing here.

Who This Strategy Is Best For — And Who Should Look Elsewhere

The equity-heavy, low-cost index fund approach I have described is best suited for children who have at least 40 years until retirement, parents who can resist the urge to react to market drops, and families contributing modest, regular amounts they will not need to touch. It also works best at brokerages that offer the fund categories I described — Fidelity, Schwab, and Vanguard all do, with slightly different fee structures and minimum investment requirements.

That said, this approach requires you to actually invest the money rather than leave it in cash. It also requires some emotional resilience. A child’s Roth IRA will drop in value during market downturns. That is normal, expected, and ultimately irrelevant over a 50-year horizon. However, if seeing a negative balance triggers you to sell or change strategy mid-downturn, the approach breaks down.

Individual stocks are not something I recommend for a child’s retirement account. A single company can go to zero. A total market index fund cannot. The concentration risk of individual stock picking is simply not appropriate for money that has one job: to compound, untouched, for 50 years.

Final Verdict: The Best Investments for a Custodial Roth IRA Are Simple, Cheap, and Equity-Heavy

After more than two decades of managing my own accounts and reading everything I can find on long-term portfolio construction, my honest conclusion is that the best investments for a custodial Roth IRA are almost boringly simple: a low-cost total market index fund, an S&P 500 index fund, or a combination of domestic and international index funds, held for decades without tinkering. The specific fund matters far less than the expense ratio, the time in the market, and — most critically — the fact that the money is actually invested rather than sitting in cash.

Check the expense ratio. Confirm the current contribution limit at irs.gov. If your child’s account is sitting in something expensive, remember that switching funds inside a Roth IRA is not a taxable event. Make the change, lower the cost, and let the decades do their work.

Nothing in this post is personalized financial or tax advice. Tax rules, contribution limits, and brokerage policies change regularly. Please verify all figures at irs.gov and consult a qualified financial or tax professional for advice specific to your family’s situation.

Frequently Asked Questions

What are the best mutual funds for kids’ Roth IRAs?

The best funds prioritize low expense ratios, since every dollar of tax-free return matters over decades. Focus on total US stock market index funds, S&P 500 index funds, or total international stock index funds from major brokerages like Fidelity, Vanguard, or Schwab—all offering ratios of 0.10% or lower. Avoid target-date funds unless they match the child’s actual retirement year, not the nearest available date.

What’s the best way to invest money in a custodial Roth IRA for a 16-year-old?

With roughly 50 years until retirement, prioritize equity-heavy, growth-focused investments rather than conservative allocations. Consider total US stock market index funds, S&P 500 index funds, or a combination including international exposure. The key is ensuring money is actually invested in something that grows, not sitting in a settlement fund or money market account earning minimal returns.

What custodial Roth IRA investment options should I consider?

Four main categories work well: total US stock market index funds offering complete US diversification, S&P 500 index funds covering the largest companies, total international stock index funds providing geographic diversification, and target-date funds for hands-off management. All should have expense ratios under 0.15% at major brokerages. The choice depends on whether you prefer automatic rebalancing or manual portfolio management.

Why do expense ratios matter so much in a child’s Roth IRA?

A Roth IRA shelters growth from taxes forever, making it invaluable real estate for long-term investing. Lower expense ratios mean more of your returns compound tax-free over decades. Even small differences in fees compound significantly, which is why near-zero ratios—0.03% or lower—from major brokerages are exactly what you want inside this account.

If the account is not open yet, start with what you need to open a custodial Roth IRA.