Start a Roth IRA for kids (2024)

We’ve all heard it said that it’s never too early to start saving for retirement. Usually, people think that means as early in their career as possible.

But while contributing to a 401(k) through your first employer is how many people begin investing, minors have an opportunity to get a jumpstart on the future, too, with a Roth IRA for kids.

Also called a custodial IRA, this investment account allows children to contribute after-tax dollars toward retirement. Like a traditional Roth IRA, the money can be withdrawn tax free once the account holder reaches age 59½. However, a Roth IRA for kids has a few different rules.

Who is eligible for a Roth IRA for kids?

Any child aged 17 and younger can contribute to a Roth IRA if they earn income. The IRS defines earned income as “wages; salaries; tips; and other taxable employee compensation. Earned income also includes net earnings from self-employment.”

For kids, earned income can include money from a W-2 job, such as working as a bagger at a grocery store or caddie at a golf course. It can also be from self-employment gigs, like babysitting, dog walking and yard work. Infants may also qualify if they earn income, such as from modeling.

While a self-employed child may receive a Form 1099, it’s more often the case that they don’t. The lack of this form won’t preclude them from investing in a Roth IRA. The minor (or their parent or guardian) will need to keep records or receipts that detail the type of work they did, when it was done and for whom, and the amount received.

Kids may receive money in the form of an allowance or cash gifts, but these forms aren’t considered earned income by the IRS. However, a child can claim money paid to them by their parents or guardian if it’s for work they also do for others, such as a lawn mowing business.

Custodial Roth IRA rules

As with any investment vehicle, there are rules attached to an IRA for kids. Here’s an overview of eligibility, contribution limits, tax implications and rules for withdrawals.

Custodial Roth IRA eligibility
If a child is 17 or younger and earns income that they pay tax on, they are eligible for an IRA for kids.

Custodial Roth IRA contribution limits
Just like Roth IRAs for adults, the contribution limit for a Roth IRA for kids in 2023 is $6,500 or the total annual earned income, whichever is less. If a child earns $4,000 mowing lawns, they can contribute up to $4,000 to a Roth IRA. Anyone can contribute to a custodial Roth IRA if the child has the earned income to qualify the contribution. That means a parent could make the deposit for them or encourage savings by matching it.

Custodial Roth IRA tax implications
Your child’s Roth IRA will be funded with after-tax dollars, so when they’re ready to withdraw from it during retirement, they won’t pay tax on that money.

Custodial Roth IRA withdrawals
If the Roth IRA has been open for at least five years, the account owner can withdraw any of the money they’ve contributed for any reason, without tax or penalties. Distributions from earnings, however, may be taxable and subject to an early withdrawal penalty. There are a few ways some earnings can be used early without penalties or taxes, such as the purchase of a first home or for a medical disability. The money can also be withdrawn and used for qualified education expenses; there won’t be a penalty, but the earnings will be taxed as income.

Benefits of a Roth IRA for kids

A Roth IRA can be a good fit for kids for several reasons.

• Compound interest. While most people work 30 or 40 years until they retire, kids who open a Roth IRA could benefit from 50 years or more of tax-free growth due to compound interest. As a hypothetical example, just one $6,500 deposit into a Roth IRA for kids could be worth over $190,000 after 50 years and more than $375,000 in 60 years, assuming a 7% annual return. If the child continues to contribute $6,500 a year, they could have almost $3 million after 50 years and $6 million in 60 years, assuming the same rate of return.
• Potentially higher returns than a savings account. Roth IRAs are tied to the stock market, and historically, the S&P 500 Index has averaged a 6.5% to 7% annual returnover the past 25 years,¹ while the currentaverage savings account pays 0.40% interest.²
• Kids’ zero or low income tax. Roth IRAsare most beneficial when your contributions are made at a lower tax rate and you anticipate being in a higher tax rate when you start to make withdrawals. This is true for kids, who often pay little to zero income taxes, which means they win on both ends of the transaction.

How to start a Roth IRA for kids

A Roth IRA for a child needs to be started and managed by a parent or other adult as a custodial account. The child needs a Social Security or other tax identification number, plus earned income.

The Roth IRA stays a custodial account until the child reaches the age of majority, which is 18 in most states. At that time, the account will need to be converted into an individual Roth IRA, giving the child irrevocable and legal rights to it.

Starting a Roth IRA for kids gets them involved in money management strategies early. Kids can learn first-hand the power of hard work, saving and investing. Parents can give them a gift that has the potential to keep on giving.

Read more about opening an IRA.

1 Markets will be markets: An analysis of long-term returns from the S&P 500, McKinsey & Company, August 4, 2022.

2 National Rates and Rate Caps, FDIC, as of May 15, 2023.