Regular readers know that I LOVE Roth IRAs and Roth 401(k)s.
The chance to save for the future in a “bucket” where money can potentially grow tax-free, and be accessed tax-free under the right rules- is, in my opinion, one of the best planning opportunities out there.
So let’s say you and your spouse are doing all the right things:
- Maxing out your Roth IRA contributions (when eligible)
- Making strong Roth 401(k) contributions at work
Then the question naturally becomes: What about the kids?
Can kids have a Roth IRA?
Yes. There’s no age requirement to own a Roth IRA.
But (you knew there was a but) a few important details matter.
1) A minor needs a custodian
If your child is under the age of majority in your state, you’ll typically open a custodial Roth IRA. The account is for the child (in their name and for their benefit), while an adult serves as custodian until the child reaches the required age.
2) Your child must have earned income
This is the big rule: Roth IRA contributions require earned income.
That can include:
- W-2 wages from a part-time job
- Self-employment income (babysitting, lawn mowing, dog walking, tutoring, etc.)
If it’s self-employment income, good recordkeeping matters. If you’re going to do this, keep notes of dates, payments, and what work was performed. It doesn’t need to be fancy, but it should be real.
3) Contribution limits apply (and they change over time)
Your child can contribute up to the annual IRS limit or their earned income for the year, whichever is less.
For example (current as of recent IRS limits):
- Roth IRA limit: up to $7,000 per year (and $8,000 if age 50+, not a “kid issue,” but good to know)
These limits are periodically adjusted, so always confirm the current year’s numbers.
“Is it a good idea?”
In many cases: sure, it can be a great idea.
Why? Time.
A Roth IRA for a teenager isn’t about “beating the market” or picking the perfect investment (please don’t turn this into a day-trading experiment). It’s about giving money decades to potentially compound.
Even modest contributions, done early, can be meaningful later.
Don’t forget what makes a Roth IRA so powerful
A Roth IRA:
- Does not provide a tax deduction when you contribute
- Can potentially grow tax-free
- Can offer tax-free qualified distributions in retirement
The big retirement rule of thumb is:
- Qualified Roth IRA distributions are generally tax-free when you are age 59½ or olderand you’ve satisfied the Roth IRA 5-year rule.
The kid Roth IRA rules that parents misunderstand most
Let’s clear up a few common points.
Contributions can generally be withdrawn anytime
In many cases, Roth IRA contributions (your “basis”) can be withdrawn at any time, for any reason, without federal income tax or penalties.
That flexibility is part of what makes the Roth IRA unique.
Earnings are different
Investment growth (earnings) can be subject to taxes and/or a 10% penalty if withdrawn before the rules for qualified distributions are met.
There are exceptions where the 10% penalty may be avoided (rules are specific and not always simple), such as:
- Certain qualified higher education expenses
- A first-time home purchase (up to a lifetime limit of $10,000 in earnings)
Important: avoiding the penalty does not automatically mean the distribution is tax-free. The tax treatment depends on the situation and whether the distribution is “qualified.” This is where a good advisor and a tax professional can help you avoid expensive assumptions.
Roth IRA vs. taxable accounts vs. traditional IRAs (the quick comparison)
If you’re deciding where savings belong, here’s the big picture.
Taxable brokerage account
- You may owe tax along the way on interest, dividends, and realized capital gains
- More flexibility (no retirement account rules)
- But fewer “tax-free” benefits
Traditional IRA
- May offer a tax deduction (depending on income and workplace plan coverage)
- Growth can be tax-deferred
- Distributions are generally taxed as ordinary income
Roth IRA
- No deduction up front
- Potential for tax-free growth
- Potential for tax-free qualified distributions
So…Roth or Traditional? It depends on future tax rates (and your retirement picture)
Here’s the classic planning concept:
If your tax rate is the same at contribution and withdrawal, the net result can be similar.
But most real lives aren’t that neat.
Consider:
- Will you spend more or less in retirement?
- Will your income sources be mostly Social Security, pensions, required minimum distributions (RMDs), portfolio withdrawals—or some mix?
- Do you think tax rates will be higher, lower, or just…different?
This is one reason I often like Roth money as part of a broader plan- it can provide flexibility when you’re managing taxes in retirement.
A “Rich” reminder about the big picture
We can’t predict what Congress will do. We can’t know future tax law. And we definitely can’t control markets.
But we can plan for flexibility.
Having a mix of account types- taxable, tax-deferred, and Roth- can give you more levers to pull later. And if your child can start building Roth dollars early, that can be a long-term win.
A few practical tips if you’re considering a Roth IRA for your child
- Match the contribution to earned income. Don’t exceed what they truly earned.
- Document earnings, especially for gig/odd jobs.
- Keep it simple on investing. A diversified, long-term approach is usually the point.
- Treat it as a teaching tool. Involving kids in the process (even lightly) can build great money habits.
Final thoughts
A Roth IRA for kids isn’t for everyone, and it’s not the only way to save for a child’s future. But if your child has legitimate earned income, a custodial Roth IRA can be a powerful way to start building long-term wealth—and to teach the kind of financial habits that matter.
If you’re wondering how Roth accounts (for you and your family) fit into a bigger retirement plan, working with a qualified financial professional can help you evaluate the tradeoffs and avoid mistakes.
If you’d like help deciding whether a custodial Roth IRA makes sense in your family’s situation—or you want to coordinate it with your retirement, tax strategy, and other goals—contact Rich Dunn to schedule a conversation. A quick planning discussion can help clarify next steps and ensure any decisions align with your broader financial picture.
This article is for informational purposes only and is not individualized tax or legal advice. Tax rules are complex and subject to change. Consider working with a qualified tax professional regarding your specific situation.
Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
FAQs
1) Can I “pay” my child so they can contribute to a Roth IRA?
Maybe, but the key is that the income must reflect real work at reasonable pay. For example, legitimate wages for helping in a family business may be possible when done correctly and documented appropriately. If you’re considering this, coordinate with your tax professional to make sure wages, payroll reporting, and records are handled properly.
2) What if my child earns less than the Roth IRA limit?
Then their maximum contribution is generally limited to what they actually earned for the year. For example, if they earned $2,500, the most they can contribute is typically $2,500, even if the annual IRS limit is higher. You (or grandparents) can gift them money to fund the contribution, but the contribution amount still can’t exceed earned income.
3) Should the Roth IRA be invested aggressively since the time horizon is long?
A long time horizon can support taking more market risk, but “aggressive” should still mean diversified and appropriate—not speculative. The goal is long-term compounding, and that usually aligns with broad, low-cost diversification rather than trying to hit home runs. The best choice depends on the family’s goals, the child’s timeline for the money, and how you plan to use the Roth IRA as part of broader planning.