Custodial Roth IRA: How And Why To Start A Roth IRA For Kids

When it comes to financial planning for the next generation, custodial Roth IRAs stand out as a unique retirement account with distinct tax advantages.

An adult (usually a parent) sets up the custodial Roth IRA on behalf of a minor, and the minor becomes the sole owner of the account once they reach legal adulthood, usually 18 or 21, depending on the state. A custodial Roth IRA offers the beneficiary tax-free withdrawals in retirement but also the flexibility to access contributions earlier without incurring an early-withdrawal penalty.

Here’s everything you need to know about custodial Roth IRAs, including how to set one up.

What is a custodial Roth IRA?

A custodial IRA allows the account holder (in this case, your child) to contribute after-tax dollars toward retirement. For the most part, a custodial Roth IRA operates in the same way as a regular Roth IRA with one main difference: Because custodial Roth IRAs involve minors, they need to have a parent (or another adult) assigned as a custodian.

Custodial Roth IRA rules

If you’re familiar with how Roth IRAs work, then you already understand the basic rules of custodial Roth IRAs. But there are also some specific rules that apply to accounts for underage children. Here’s what you should know.

• Eligibility
  

  To be eligible for a custodial Roth IRA, your child needs to earn income. It doesn’t matter if they’re working for an employer or providing services like babysitting, as long as the child is making money and paying taxes on it, they can contribute to a custodial Roth IRA.

• Contribution limits
  

  For 2025, the annual contribution limit for custodial Roth IRAs is $7,000 or the total amount of money that your child made during the year, whichever is less. If, for example, your daughter made $4,000 as a lifeguard, she could contribute up to $4,000 to her custodial Roth IRA this year. If she made $8,000, she would be able to contribute up to $7,000.

• Tax implications
  

  Custodial Roth IRAs are funded with post-tax dollars. That is, income tax and other applicable taxes have already been taken out. That’s why when your child is ready to withdraw the money for retirement, they won’t pay income tax on it (unlike traditional IRAs).

• Withdrawals
  

  Ideally, your child won’t need to make any withdrawals from the account until they reach retirement age. But even if they do decide to take out some money before then, they won’t face any penalties for withdrawing their contributions. (That’s because they already paid taxes on those deposits.) However, if they tap into their earnings before age 59 ½, taxes and a 10 percent early-withdrawal penalty may apply.

Switching to a regular Roth IRA

While your child is still under age 18, the custodian will need to manage the account’s assets. This is a great opportunity to start engaging them in the process of learning to invest. But when your child reaches the legal age in your state (usually 18 or 21), the custodial Roth IRA will need to be converted to a regular Roth IRA in their name. Before you convert the account, make sure that your child understands what’s happening and knows how to keep making contributions to the account.

Traditional IRA vs. custodial IRA for kids

A custodial IRA doesn’t have to be a Roth. You could, for example, choose to open a traditional IRA for your child.

Like a custodial Roth IRA, a custodial traditional IRA is subject to the same rules of the adult version of the account:

• Account contributions are made with pre-tax dollars.
• Earnings within the IRA are tax-deferred, meaning your child pays no taxes on investment growth while the money remains in the account.
• Eventually, taxes are due. That time comes when it’s time for your child to make withdrawals in retirement when that money will be subject to taxes.  

A custodial Roth IRA, like its adult parent, works differently:

• The account is funded with post-tax money. This also means that your child can withdraw contributions at any time, tax-free and penalty-free.
• Earnings growth within the account grows tax-free (versus tax-deferred in a traditional IRA).
• Withdrawals are also completely tax-free. 

It’s hard to justify choosing a traditional IRA over a Roth IRA for children, because traditional IRAs are designed for people in higher tax brackets, offering advantageous deductions upfront to help lower their current taxable income. This situation typically doesn’t apply to kids, who usually only earn small amounts of money from their jobs. 

Also, a traditional IRA is a choice to defer taxes to an unknown rate in the future. Here, again, it’s likely that a child will be in a higher tax bracket in adulthood, which means that the future tax hit will be higher than the tax savings they would receive on present-day contributions. 

By paying a low tax rate now with the Roth, a child can enjoy decades of tax-free growth and then owe nothing later, even if they’re in a higher tax bracket.

How to open a custodial Roth IRA for your kids

The steps to open a custodial IRA are simple

1. Choose a provider: Many online discount brokers offer custodial IRAs. Our list of best custodial investment accounts includes Fidelity Investments, Charles Schwab and E-Trade. The brokers that made our list have no account minimums, low fees, provide a range of educational resources and make it easy to invest small amounts of money.    

2. Open an account using both your and your child’s information: It only takes a few minutes to open a custodial account online. You’ll need to provide some basic information about yourself (the custodian) and your child, including Social Security numbers, employment details, annual income and banking information.

3. Fund the account: The easiest way to fund the custodial Roth is via a direct transfer from a bank account into the brokerage account. You don’t have to fully fund the IRA all at once. Work with your child to determine how much they’ll contribute and how often. To encourage them to save, offer to “match” your child’s contributions as if it were a 401(k) plan. Just make sure that your combined contributions don’t exceed the amount of money they earned during the year.

The benefits of opening a custodial Roth IRA

To review, here are some of the great perks that these accounts offer for kids.

• Custodial Roth IRAs will grow your children’s money for decades: By contributing to their retirement savings early on, your child will benefit from decades of tax-free, compounding growth. Eventually, they could end up with a comfortable nest egg to support them after they stop working.
• It gives them real-world investing experience: Many people don’t recognize the importance of saving and investing for the future  until they’re well into adulthood. With a custodial Roth IRA, you can help your kids establish good financial habits from a young age.
• The accounts can be used for other important life events as well: Ultimately, Roth IRAs are designed for retirement saving. But your child can also make penalty-free early IRA withdrawals for other purposes, including emergencies, college expenses and buying a home.

Bottom line

Custodial IRAs are a great way to ensure your children get a step ahead financially from a young age. Many adults realize too late the importance of retirement planning, but by utilizing a custodial account you can instill in your children important investment principles starting now.

— Bankrate’s Logan Jacoby and Dayana Yochim contributed to an update of this story.