Start a Roth IRA for Kids for a Financial Slam Dunk

By Josh Patoka and Jackie Beck   Updated 10/27/2022 at 1:10 pm

You can open a Roth IRA for kids if they meet certain requirements, which is a great thing. If you’d like to find out how to set up a Roth IRA for your kids, and what the requirements are for that, read on.

But first, why consider doing this?

A Roth IRA (which is also sometimes called a custodial IRA for kids) can be an excellent way for parents to help their children invest for the future.

While retirement plan options are probably the last thing on your child’s mind, that doesn’t mean you can’t put the idea of preparing for the future there.

You can show them the power of starting early and help them form good habits now, or just start the process for them if they are very young. (Even a baby can have a Roth IRA, IF they meet the requirements. As we’ll go into later, there’s no minimum age to open an IRA.)

Opening and funding a Roth IRA for your kids can be a great way to give them a financial head start in life.

If You’re Wondering What a Roth IRA Is…

In short, it’s used to set aside after-tax money for retirement, and you usually invest within it. It’s a type of individual retirement arrangement that’s named for a senator.

Under current US tax law, each dollar contributed to a Roth IRA is allowed to grow tax-free while it’s in there. So when you open one for your child, that gives them a LOT of time for potential earnings. Don’t underestimate the value of money potentially growing over time.

(Of course, all investments could lose value and not investing has inflation risk. You should consult a professional who knows your and your child’s situation. Your child’s mileage may vary.)

Opening a Roth IRA for your child is easy as you will see, but it’s worth going over a few more of the benefits of having one.

If you already know the benefits and requirements, you can click here to skip to the How to Open a Roth IRA for Kids section.

Benefits of Using a Roth IRA for Kids

With a Roth IRA, contributions are made with earned income, and there’s no tax deduction for your contribution. But currently all earnings within a Roth IRA grow tax-free. And there’s an even bigger benefit:

Contributions and any earnings over the years can be tax free when your child takes them out after age 59½, as long as they follow the rules. That can be huge, to say the least.

(You can find the details on qualified distributions in IRS Publication 590-B.)

As a bonus, money set aside in a Roth IRA does not count as an asset on the FAFSA form. which means it does not affect financial aid. So if you’re thinking ahead to possible financial aid for college, that could be a benefit too. It can be one way to fund your child’s education. (A 529 is another option.)

Those are some great advantages!

Why a Roth vs. a Traditional IRA for Kids?

A Roth is usually better for kids than a Traditional IRA, because most children don’t earn a large income. They are most likely in the lowest income tax bracket, if they are even required to pay any federal income taxes at all.

They also have decades to earn, contribute, and hopefully watch their investments grow. The Roth IRA is usually a better option because they will pay potentially fewer taxes today than they likely would on withdrawals from a Traditional IRA after several decades of compound growth.

Of course, tax laws could change between now and when your child retires in the distant future. None of us can predict for the future — we can only do the best we can with what we know now.

How Old Do You Have to Be to Open a Roth IRA?

Zero years old, if you qualify and your parent or guardian does it for you. There’s no age limit to open one tax-wise. But while the IRS does not have any minimum age requirement to open an IRA, some places you can open them might. So you’ll want to do so at place that allows custodial Roth IRAs.

While you can open a retirement account for children at a bank and place the money in a CD, for example, many people prefer to open the account at a brokerage. This allows you to make investments within it.

Not all brokerages offer custodial accounts for minors, because some want all of their customers to be at least 18. Because minors can’t usually sign contracts, that means you need to find one that does.

These three brokerages offer custodial IRA accounts for kids:

As of time of this writing, they also have no minimum investment requirements to open an account.

You can go to any of those sites to open up Roth IRAs for your children, if they meet the income requirements. Once you do that, you as their parent or legal guardian will be able to open the child’s IRA account. You’ll then take care of it until the child reaches the age of majority set by your state. Usually that’s at age 18 or 21.

You’ll be the legal owner of the account until then, and will be responsible for managing it for your child’s benefit. The money is theirs, even though you are taking care of it while they are a minor. Once your child reaches that age, the account ownership will need to be switched to your child.

Requirements for Opening a Roth IRA for Your Child

There are two major types of requirements for opening an IRA for minors:

  1. your child must have earned income
  2. you must use a custodial account

Let’s talk about some of those next.

The Earned Income Requirement

The IRS requires earned income in order to open or contribute to a Roth IRA. That means the person the account is for must have earned income for the year they make contributions. For a child, earned income would include:

  • Wages or salaries
  • Commissions
  • Self-employment income

This means your child must have earned income from a job, earned money by getting paid commissions, or earned money as a self-employed person during the tax year they want to contribute in.

Here are a few examples that could be considered earned income:

  • your baby earns money appearing as a model in a national print ad for diapers
  • your teenager makes minimum wage at their part time job at the local fast food restaurant
  • you own a small business, and your 6th grader earns a reasonable amount of money doing ordinary and necessary work for it
  • your teen works earns money from neighborhood families for babysitting, cleaning, or yard work

While this is not a complete list, earned income would NOT include things like:

  • birthday money
  • savings account interest
  • an allowance for doing chores around the house

For example, if you pay your child $5 to mow your grass, that is not earned income. That’s being part of a family and doing chores. But if they mow the neighbor’s grass and the neighbor pays them $5, that IS earned income and could be contributed to a Roth IRA.

Before making any contributions, definitely talk with your tax professional if you have questions about whether or not something is considered earned income. That is the requirement, and you don’t want to make a mistake there.

Additional options for small business owners

If you are a small business owner yourself, you may be able to have your child do work for your business as a contractor or hire your children as an employee.

(Nolo has a nice article on hiring your children that includes things to watch out for.)

This is what Shanah Bell, author of The Art of Being a PITA and the owner of multiple small businesses, does. She explains how she handles it with her son here:

My teenage son works for one of my businesses so that I can teach him responsibility, and the value of a dollar. Since that business boards dogs, he assists with cleaning up dog poop, mowing the yard, vacuuming and mopping, cleaning off dog paws, bathing, feeding, walking, brushing and washing towels used for boarding.

He keeps track of his hours and what tasks he has been working on and submits it to me monthly. I then input this information into Quickbooks for the total amount he is due for the month. I submit the payment through my bank’s bill pay system to be direct deposited into his account. Once the money has been deposited into his account, I then deposit the funds into his Roth IRA. Once it is in there, we both sit down and decide which ETFs to disburse the funds into for investment.

By working for me, he is gaining earned income, which can then be deposited into the Roth IRA I opened for him. He can make up to the standard deduction without having to file taxes, and it reduces my company’s taxable income by however much I pay him. This is not only a win for me, but for him, since he is putting the money in a Roth IRA.

How Much Can a Child Contribute to a Roth IRA?

It depends how much the child earns, but for tax years 2021, 2020, and 2019, the total annual IRA contribution limit is no more than $6,000 per year. (As long as they have at least $6,000 in earned income.) But if your child makes less than $6,000, the annual limit is the same as their actual income.

For example, your child can only contribute $2,000 to their IRA if they only earn $2,000 that year. But if your child earns $7,000 annually, they can put in to $6,000.

Parental matching

Some parents like to use a “parental match” strategy to encourage their children to make IRA contributions. This strategy involve letting your child know that you will match any amount they contribute to their IRA, and then giving them that amount as a gift. The parental match is an incentive to encourage kids to save and invest their earned income in the IRA. (If you’re curious about whether you can directly contribute to an IRA for someone else, this article has some good points to consider.)

Doug Nordman, author of The Military Guide to Financial Independence and Retirement, used this strategy with his daughter. He explains:

Documenting their earned income is up to you (subject to the IRS’ possible review): W-2 or 1099-MISC (for work outside the family), or just the records of your family business. It’s a lot easier to document the earnings as they happen instead of trying to catch up when you get an IRS or state query letter.

It’s also worth reporting the earned income on a tax return. Of course you’d do this to refund excess withholding (like W-4 income-tax withholding) but the tax return is a permanent record of the earned income.

“Parental matching” is not an IRS-approved tactic. It’s essentially parental bribery to get the young worker to put all of their earned income in their Roth IRA. Since the benefits of the compounding are too important to screw up, I’d certainly encourage the parental bribery. Our daughter wasn’t a big fan of Roth IRAs when she was 14 years old but she has a much different perspective in her mid-20s.

Start Your Kids Saving and Investing Now

Putting any money into savings or investments is a great way to help your child. However, the Roth IRA can be the best option for kids. This is because children can have many decades for tax-free earnings to build up.

The sooner you start saving and investing, the more time your money has to potentially grow. Even if your child can’t max out the $6,000 annual contribution limit, every dollar they can put in can make a difference.

Play around with this compound interest calculator from to see just how much even a single contribution could potentially be worth 30 or 40 years later.

You might be surprised at the results, and your child might be excited at the idea.

If your child waits to invest their first $6,000 until after college, that same $6,000 would have less time to grow, and would be worth a whole lot less even if everything else was the same.

It’s incredible how much of a difference 10 years can make when you look at the numbers. That’s why it’s so important to try and achieve financial independence as soon as possible.

How to Open a Roth IRA for Kids

Once you know your child qualifies, opening a Roth IRA for your child is quick. The account setup process is nearly identical to opening an IRA for adults.

Step 1: Pick a Brokerage

The largest brokerages offer custodial Roth IRAs. Each brokerage has a slightly different on-boarding process. Parents can choose to open a traditional or Roth IRA. Make sure you choose the Roth IRA to qualify for tax-free withdrawals.

You may choose the same brokerage where you keep your investments. Or you may try one of these if your current brokerage doesn’t offer child accounts.

Be sure to take investment options, account opening fees, annual fees, and trade fees into account when making your decision. Once you have the account open, don’t forget to decide where to invest the money.

Again, Vanguard, Fidelity, and Charles Schwab are three brokerages that offer custodial IRA accounts for kids.

All of those brokers offer low-cost index funds and target date retirement funds. IRAs also give you the option of holding individual stocks plus ETFs or mutual funds of your choice. You don’t have to stick to a select list of funds like in a workplace 401k plan.

Step 2: Add Funds

Your child can child can contribute up to $6,000 of their earned income for the year (if they earned at least $6,000 that year.) The only stipulation is that the child must have earned income for that tax year.

Contributions for the current tax year can be made anytime on or before the federal income tax filing deadline for that tax year. For example, you have until April 15, 2022, to contribute up to $6000 to the IRA for the 2021 tax year. (You can put in up to $6000 for 2022 as well.)

But don’t wait until the last minute to open the Roth IRA and start contributing. It can take time to open the account and for the brokerage to get and process contributions. That means if they don’t get it done in time, you’ll miss the deadline.

As long as you don’t exceed the annual contribution limit, it doesn’t matter how often you make a contribution. It can be every paycheck, once a month, or once a year.

Step 3: Invest

In a brokerage account, the IRA’s cash balance may earn a small amount of interest similar to a bank account. But you will need to invest the cash to increase the potential income. Two popular and effortless options are using index fund and target date retirement funds vs. buying individual stocks.

A simple model portfolio example is putting 80% of the IRA balance into a total stock market index fund holding U.S. and foreign stocks. In this model, the remaining 20% would go into a total bond index fund holding bonds from U.S. and foreign governments and companies.

You can also answer a brokerage questionnaire or have a financial advisor draft a model portfolio to help you pick the best stock-to-bond asset mix for your child. Typically a long time line before retirement means you can be more aggressive. (But you’ll need to decide what’s right for your child’s situation.)

The Bottom Line: Harness the Power of Early Investing Today

A Roth IRA for kids is one of the best ways to help your child build their net worth for the future. It’s also perhaps one of the least-used investment tools because most people focus more on near-term goals. If you want to teach your child investing, a custodial IRA is a great starting point.

Are you ready to open a Roth IRA for your child? How else are you helping your family save for the future?

Rocket your child forward with a Roth IRA for kids

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