Custodial Roth IRA for Kids: A Complete Guide for Parents

A Custodial Roth IRA is one of the most powerful long-term wealth-building accounts you can open for a kid — and one of the most misunderstood. Most parents who want to set one up stop short when they hit the first sentence of any guide: your child needs earned income. That sounds disqualifying for anyone under 14, but it's not what it sounds like, and the threshold is lower than you think.

This guide covers what a custodial Roth IRA actually is, what counts as earned income for a kid (and what doesn't), how to document it so you'd survive an IRS look, contribution strategies that work at different ages, and what happens the day your kid turns 18.

What a custodial Roth IRA is, in one paragraph

A custodial Roth IRA is a regular Roth IRA — opened in your child's name with their Social Security Number — but managed by you as the custodian until they reach the age of majority (18 in most states, 21 in a few). Contributions go in after tax. The money grows tax-free. Qualified withdrawals after age 59½ are tax-free. The only difference from an adult Roth IRA is who's holding the steering wheel until the kid is legally old enough to drive it themselves.

The earned-income requirement (the part most parents get stuck on)

The IRS requires the account holder to have earned income — wages or self-employment income from actual work — to contribute to any Roth IRA, kid or adult. The annual contribution is capped at whichever is lower:

• The standard annual Roth IRA limit ($7,500 in 2026), or
• The child's total earned income for the year

So if your 12-year-old earned $1,800 babysitting and mowing lawns last summer, the most they can put into a Roth IRA for that year is $1,800. If they earned $9,000 modeling in a national ad campaign, the cap is $7,500.

The contribution doesn't have to come from the kid's pocket. Most parents fund the Roth themselves and let the kid keep their earnings as "spending money." The IRS only cares that earned income existed in an amount at least equal to the contribution. It doesn't care whose bank account the contribution physically came from.

What counts as earned income for a kid

This is the part most guides hand-wave. Here's the practical answer.

Clearly counts

• W-2 wages from any employer. If your kid worked a real job — summer camp counselor, retail, modeling agency, a relative's business — and got a W-2, the IRS treats that as earned income with zero ambiguity.
• 1099 income from real freelance work. A teen who does design freelance, tutors, or runs a small business gets a 1099. Counts as self-employment income.
• Cash income from real work, properly documented. Babysitting, lawn-mowing, dog-walking, snow-shoveling — these have always been the classic examples. The IRS allows them; you have to keep your own records (more on this below).
• Paid work in a family business. If you own a business and your kid does legitimate work in it (helping with social media, packing inventory, modeling for promotional photos), you can pay them a reasonable wage. This is one of the most powerful and most-abused setups — keep reading the "documentation" section.
• Acting, modeling, performing, content-creation income. If your kid was paid because of work they did (not because of a gift), it counts. Custodial Roth IRAs were historically popular among child actors for exactly this reason.

Doesn't count

• Allowance. Allowance is a gift from a parent, not compensation for labor. Even if you require chores in exchange, the IRS classifies it as parental support, not earned income.
• Birthday and holiday money. Gifts. Not earned.
• Investment returns. Dividends and capital gains in a UTMA or custodial brokerage are unearned income — useful, but not eligible for Roth contributions.
• Sports scholarships, prize money. Generally classified as unearned.
• Sales of personal belongings. Selling old toys on eBay isn't earned income. Building and selling something you made could be — the line is whether it's a hobby or a business.

How to document it so it survives an IRS look

Most kid Roth IRAs are never audited. But the contributions show up on the kid's (eventually-filed) tax return, and the earned-income claim has to be defensible. Three rules:

1. Keep a log. A simple spreadsheet with date, what they did, who they did it for, hours worked, and amount earned. Doesn't need to be fancy. Doesn't need to be a legal contract. Needs to exist.
2. Pay by traceable methods when possible. Venmo, Zelle, or check from the customer (or from your business) leaves a paper trail. Pure cash payments are legal but harder to defend.
3. File a return if required. Kids who earn over the IRS standard deduction in a year ($16,100 in 2026 for unmarried dependents on earned income) have to file. Self-employment income over $400 triggers self-employment tax filing regardless of total. A tax pro for the first year is worth it.

The gold standard for parents who pay their own kids through a business: a real W-2, quarterly payroll filings, and a written job description. Overkill for $2,000 of summer income; appropriate for $7,500 of year-round work.

Contribution strategies by age

The contribution cap is whichever is lower: $7,500 or what the kid earned. Practically, that means:

The math of starting early

A single $3,000 contribution made at age 8, left untouched until age 65, grows to roughly $109,000 at an average 6.5% real return. The same $3,000 contributed at age 25 grows to about $37,000. The 17-year head start is worth almost three times as much, despite being the same dollar amount.

You can't replicate this later. Once your kid is past their teenage earning years, the Roth IRA contribution window closes a little more every year. That's why parents who can fund their kid's Roth often choose to — the dollars themselves are relatively small, but the compounded outcome is enormous.

Where to open one

Custodial Roth IRAs are offered by every major brokerage. The mechanics are identical across providers — pick based on UI, fees, and what you already use:

• Fidelity — no account minimum, no maintenance fees, broad fund selection. The most common recommendation.
• Charles Schwab — same: no minimum, no fees, excellent fund lineup.
• Vanguard — no minimum, excellent index funds at low cost. UI is less polished than Fidelity / Schwab.
• E*TRADE, Merrill Edge, Interactive Brokers — all offer custodial Roth IRAs. Pick whichever you use for your own accounts to keep statements in one place.

What you generally can't do: open a custodial Roth IRA at a robo-advisor like Betterment or Wealthfront (they typically don't support custodial accounts of any type). And app-first "teen investing" products like Greenlight or Acorns Early are usually UTMA / UGMA accounts, not Roth IRAs — different account type, different tax treatment.

What happens the day your kid turns 18

On the kid's 18th birthday (21 in a few states), the account converts to a regular Roth IRA in their name. Legal control transfers. You stop being the custodian.

Practically, this means:

• They can withdraw all of it. Penalty-free withdrawal of contributions is allowed at any age; earnings withdrawal before 59½ incurs a 10% penalty plus tax.
• They can change the investments to whatever they want — including a single meme stock or crypto, if the brokerage allows it.
• They can close the account.

There's no legal mechanism to keep your kid from doing any of this. The defense is everything that happens before the 18th birthday: showing them the account, explaining what it is, modeling long-term thinking, and letting them watch the compounding numbers grow. Kids who see their Roth IRA balance every week through high school almost never touch it at 18. Kids who first hear about it on their 18th birthday frequently do.

Roth IRA vs UTMA vs 529 for the same kid

Custodial Roth IRA is one of three common "long-term account for my kid" options. They serve different purposes:

Most families with a kid earning real income end up running a Roth IRA + a 529 in parallel — the 529 funds college, the Roth funds everything else. UTMAs make sense for shorter-term, flexible savings (the "down payment on a first car" bucket) but carry the heaviest financial-aid penalty if college is a possibility.

What to invest the Roth IRA in

This is the part where we are deliberately not giving you a specific recommendation. The right answer depends on your kid's age, your risk tolerance, your other assets, and a dozen other variables.

The high-level shape most parents settle on for a kid's Roth IRA with 50+ years until retirement:

• Heavy on diversified stock-index funds. With decades of runway, time in the market does the heavy lifting.
• Low fees. A few basis points of expense ratio compound to thousands of dollars over 60 years.
• Boring. The Roth IRA isn't the right place for a kid to "learn about picking stocks" — that's what their UTMA is for, where the stakes are lower.

If you want kid-facing engagement (showing the balance and holdings to your child to help them understand what they own), you don't have to choose between "boring index fund" and "visible to the kid" — that's what dashboards like MemoryBank exist for.

Frequently asked questions

Can my kid have a Roth IRA without a job?

No. The IRS requires earned income — wages or self-employment income from real work — to contribute. Allowance, gifts, and investment income don't count. The good news is the bar for "earned income" is lower than most parents think: babysitting, lawn-mowing, modeling, or paid work in a family business can all qualify if documented properly.

How much can a child contribute to a custodial Roth IRA?

Up to $7,500 in 2026, or the child's total earned income for the year — whichever is less. If your kid earned $2,400 babysitting, they can contribute up to $2,400. The contribution doesn't have to come from the kid's own paycheck; parents can fund it as long as it doesn't exceed what the child earned.

Does my child's allowance count as earned income for a Roth IRA?

No. Allowance is considered a gift, not compensation for services. The same goes for birthday money, dividends from a custodial brokerage account, and any other unearned income.

What happens to a custodial Roth IRA when my kid turns 18?

At the age of majority (18 in most states, 21 in a few), the account converts to a regular Roth IRA in the child's name. They have full legal control and can do anything with it — including withdraw it. Education about long-term thinking before that date matters more than any custodial restriction.

Can I pay my own kid to make Roth IRA contributions legal?

Yes, but the work must be real, age-appropriate, and the pay must be reasonable for the work. If you own a business, your kid can legitimately work in it. If you don't, you can't manufacture wages from chores. The IRS scrutinizes this — keep timesheets, pay by check or transfer (not cash), and treat it like any other employee relationship.

Is a Roth IRA or a 529 better for my kid?

They optimize for different futures. A 529 is best when you're confident your kid is going to college and you want a state tax deduction. A Roth IRA is best when you want maximum flexibility — the money can fund retirement, a first home, or qualified education expenses. Most families end up using both.

Where MemoryBank fits

The most common reason custodial Roth IRAs underdeliver isn't the investment choice or the contribution cap — it's that the kid never sees the account growing during the years that matter most. A 14-year-old who watches their summer job money compound, who sees their $4,000 turn into $4,300 the week of Apple's earnings call, who knows which companies they own — that kid will never empty the account at 18.

MemoryBank shows your kid's Roth IRA, UTMA, brokerage, and 529 in a single age-appropriate dashboard. They see what they own. The compounding becomes visible. The investment account stops being an abstract number on a Fidelity statement and becomes something they can point at.

The Roth IRA part is the most powerful long-term piece of a kid's financial picture. The first contribution doesn't have to be big — it has to be made.