How To Open A Roth IRA For Kids (2024)

Investing in a retirement account for your toddler or teen might sound crazy, but it’s one of the easiest ways to transfer and build generational wealth.

While money in a Roth IRA is most easily withdrawn once you’re age 59½, contributions to a Roth IRA can be withdrawn at any time without penalties. If your child is able to contribute to a Roth IRA in their teen and college years, they’ll have millions in tax-free income in retirement if they leave that money untouched.

What Is a Roth IRA for Kids?

A Roth IRA for kids is formally called a custodial Roth IRA. A custodial account is one that an adult, usually a parent, opens and manages for a child. The child gets full control of the account once they’re 18 in most states.

The money in a custodial account belongs to the child at all times. With a custodial Roth, the tricky part is that you can only contribute to it if your child finds a way to earn money . If your child earns income in their younger years, or if you want them to build life skills with a summer job as teens, you’ll be able to invest up to the annual contribution limit —$6,500 in 2023— of that earned income each year into their Roth IRA.

All money in the account grows tax free and can be withdrawn tax free at age 59½. Contributions can be withdrawn without penalty at any time. Gains can only be withdrawn for certain circ*mstances or in retirement. Otherwise, they’ll be subject to a 10% penalty plus any applicable income taxes.

If a child is able to contribute $24,000 to a Roth IRA by the time they turn 18, it can grow to a shocking amount when they reach retirement age.

That $24,000 invested into a top low cost index fund —like the Fidelity Total Market Index Fund (FSKAX), earning an average annualized return of 7.99% since its creation in 1997— would be worth $1,025,507.47 when your child turns 65. That’s tax free money without ever contributing another penny after age 18.

Rules for Roth IRAs for Kids

• There’s no minimum age limit to contribute to a Roth IRA for kids. If an infant is chosen as the next Gerber Baby and earns $10,000 in their first month, up to the annual limit can be contributed to their Roth IRA.
• The contribution limit is 100% of the child’s earned income or $6,500 in 2023, whichever is less.
• Gift income does not count toward earned income for contribution eligibility.
• Contributions are not tax deductible.
• The account’s growth and qualified distributions are not taxed.
• Contributions can be withdrawn without penalty anytime.
• Earnings generally can’t be withdrawn without penalty until your child is 59½, with some exceptions.
• Earnings can be withdrawn without penalty up to certain limits to pay for college, buy a first home, pay certain medical bills and for any reason after a total and permanent disability.
• Early distributions of earnings that don’t fall under one of the exceptions are subject to a 10% IRS penalty tax plus any applicable income taxes.
• The custodian no longer controls the account when the child reaches the age of majority in their state.
• The child will never have to take required minimum distributions from the account in retirement (unless tax laws change).

Teen Income

Wanting your kids to prioritize school during the school year doesn’t mean they can’t earn $6,500 in a year. Summer jobs pay significantly more now than 15 or 20 years ago.

In many areas of the country lifeguard positions start at $15 an hour and dishwashing positions can earn more than $20 an hour. Teens aren’t limited to W-2 employment either— they can dip their toes into self-employment, too. Starting a summer lawn service can easily pay hundreds per day in many areas.

A strong economy means less people are willing to work entry-level jobs for entry-level wages. That’s bad news for getting a table fast at your local restaurant, and good news for your 14-year-old trying to save up for a car. If your child gets a job paying $20 an hour and works 40 hours a week for nine weeks over summer break, they’ll earn $7,200 a year.

Getting teens to save all of their money for a long-off future can be difficult. Try incentivizing them with a shorter term goal that’s probably on their mind — the allure of freedom with their own car in two years when they turn 16. While you can only contribute up to their annual earned income into a Roth IRA, you can elect to “match” their contributions with money to their car fund meaning that for every dollar they put in their Roth IRA, you’ll put X% into a car fund. In the process they’ll end up maxing their Roth IRA each year, gain valuable work experience and life skills, and maybe drive a little more cautiously in the car they spent two years working and saving to buy.

Unique Ways to Get a Child Earned Income

The earned income requirement for contributions can be tough to meet for younger kids. Kids in agriculture can work under the age of 14, but 14 is the minimum age for traditional employment in non-agricultural work under the federal Fair Labor Standards Act.

If you’re trying to get a child under 14 earned income and don’t feel comfortable with them shucking corn, here are some examples of ways your child could earn income while still complying with federal child labor laws:

• Delivering newspapers. Without a vehicle or the ability to work third-shift hours, this option probably isn’t the best unless your child can get a gig delivering a small-town paper on the weekend or a weekly newspaper.
• Performing in radio, television, movie or theatrical productions. This category isn’t limited to becoming a Nickelodeon or Disney Channel star. If you’re comfortable letting your child have a public social media presence, any kidfluencer income they generate from YouTube, TikTok or Instagram can go right into their retirement fund.
• Working in businesses owned by their parents. As long as your business doesn’t require your kid to wear a hard hat or a respirator, you can employ them and funnel their earnings into a Roth. If you’re a store owner, you could hire your child to greet people and pass out snacks on holidays or special occasions.
• Serving as models for a business: If your business has pictures on its website, you might as well make them pictures of your kids. If you pay your kids to model for your business — whether that be a dental practice, a real estate agency website or a handyman service — this unique provision can allow you to create earned income for your kids.
• Babysitting. With an average hourly rate of more than $20 according to Urban Sitter, babysitting could allow your child to earn enough from one or two gigs a week to put $6,500 in their Roth IRA over the course of a year.
• Performing minor chores around a private home. If you can justify paying your child $125 a week to help out around the house, you’ll be able to max out their Roth contributions for 2023.
• Gathering evergreens and making evergreen wreaths. This odd provision may help explain why you’ll find more than 4,000 results for “evergreen wreath” on Etsy.

State laws can be stricter than federal law, so you’ll need to see what your state allows first.

How to Open a Roth IRA for Kids

1. Make sure your child has earned income. Remember, a person must have earned income in order to contribute to a Roth IRA. That rule applies to kids as well as adults.

2. Pick a broker. Possibilities include Fidelity, Charles Schwab and Vanguard.

3. Open an account. Be prepared to provide the names, addresses, birth dates and Social Security numbers of the minor child and the custodian.

4. Fund the account. Decide how much—up to 100% of the child’s earned income or the $6,500 annual limit, whichever is less—to contribute. The easiest way to do this is with an electronic transfer from a bank account.

5. Invest your contributions. It takes a few days for funds to clear the account before you can start investing them. Set a calendar reminder to make sure you don’t forget and leave the money earning almost no interest for decades. Low-cost ETFs or mutual funds that invest in the entire S&P 500 or the entire U.S. stock market may be a good choice since your child has a long enough time horizon to weather ups and downs.

Roth IRA for Kids vs. Popular Investment Alternatives

Roth IRA vs. Whole Life Insurance Policies

It’s rare that a child earns so much income that their family relies on it. It’s also unlikely that the event that would cause the life insurance to pay out—the child’s untimely death—will happen.

While whole life insurance does accumulate cash value that your child could access, accumulation is a slow process. Plus, if the insured dies with a cash value loan outstanding, the policy’s death benefit gets reduced by the loan amount. Further, child life insurance policies are typically small, with a death benefit that does not adjust for inflation.

Proponents suggest getting a life insurance policy for children as a way to guarantee they’ll have life insurance later if they’re diagnosed with something that’s hard to insure. But child policies are typically such a low value they aren’t meaningful in adulthood and converting policies to adequate amounts can be difficult and cost prohibitive if your child does develop a serious condition.

Investing in a Roth IRA for a child, as long as the child has earned income, can amount to more money over the child’s lifetime. Also, Roth IRAs go tax free to heirs, effectively making them a form of life insurance.

Roth IRA vs. Savings Bonds

Savings bonds don’t have the same tax advantages as Roth IRAs. While you don’t have to pay federal income tax on savings bond interest until you receive it—which happens when you cash the bond or it matures—you don’t have to pay federal income tax on Roth IRA earnings ever, unless you take a non-qualified distribution that warrants a 10% penalty.

Roth IRA funds can be invested in the stock market, which has historically outperformed the bond market. Suppose your grandmother had put $100 in the S&P 500 and $100 in U.S. Treasury Bonds in 1928. By 2022, the stock investment would have been worth nearly $625,000, while the bond investment would have been worth a little over $2,000, according to an analysis by Aswath Damodaran, a corporate finance and valuation professor at the Stern School of Business at New York University.

Savings bonds can be an option for a child that doesn’t have earned income, however. The interest isn’t subject to state or local income tax. Also, you can elect to pay tax on the bond’s interest annually instead of deferring it, which can pay off long term since children are usually in the lowest tax bracket.

Roth IRA vs. 529 Plans

Like Roth contributions, 529 contributions won’t get you a federal tax deduction. You can invest them, and when you take withdrawals, you won’t pay tax on any investment growth if you use that money for qualified educational expenses. 35 states and the District of Columbia will give you a deduction or credit for 529 contributions, and your child doesn’t need earned income to have a 529 plan funded in their name.

The SECURE Act 2.0 made 529 plans more flexible by allowing up to $35,000 in a 529 to be rolled over to a Roth IRA over several years. Before this, what to do with the account balance if the child didn’t attend college or got a full scholarship was a bigger concern. You were generally limited to transferring the funds to a family member or paying a penalty to cash out.

Opening a 529 plan and slightly overfunding it with the aim to convert some money via a 529 plan rollover to a Roth IRA once your child has earned income could be the smartest choice.

Roth IRA vs. UTMA/UGMA

Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are custodial accounts. They’re often used by affluent families where parents or grandparents want to remove money from their taxable estates by gifting it to the younger generation.

Unlike Roth IRAs or 529 plans, UTMAs and UGMAs don’t have income tax benefits, but they’re more flexible: The custodian can withdraw the money for any purpose that benefits the child. These accounts also don’t have an earned income requirement, nor do they have contribution limits. Contributions can be invested but any gains are taxable, which can eat away significantly at money in a UTMA or UGMA account over time compared to a Roth IRA or 529 plan.

Should You Get a Roth IRA for Kids?

If your child has earned income, saving and investing it in a Roth IRA can be a great idea. The earlier you get started, the more time they will have to benefit from compounding, and long-term investments in stocks have historically been an excellent investment.

Plus, the money isn’t locked up: Your child can always withdraw contributions tax free for an emergency or a down payment on a house. The money they don’t touch will benefit from decades of gains, creating lasting financial stability for your kids, allowing them to pursue their dreams with a safety net even when you’re no longer around.