What Is a Custodial Roth IRA?

A Custodial Roth IRA is a retirement account that an adult — usually a parent or grandparent — opens and manages on behalf of a minor child. It works just like a regular Roth IRA: contributions are made with after-tax dollars, investments grow tax-free, and qualified withdrawals in retirement are tax-free.

The key difference is that the child must have earned income from a job to qualify, and the account is held in custody until they reach the age of majority (18 or 21 depending on the state). After that, full control transfers to the child.

The mechanics are straightforward:

• An adult opens the account at a brokerage that supports custodial Roth IRAs.
• The child earns income from a job — babysitting, lawn care, a W-2 paycheck, or self-employment.
• Contributions are made with after-tax dollars, up to the child's earned income or the IRS annual limit (whichever is lower).
• The money is invested in stocks, ETFs, mutual funds, or bonds chosen by the custodian.
• Earnings grow tax-free for decades.
• The account transfers to the child at the age of majority.

Because of the long time horizon, even small annual contributions can grow into a significant balance by retirement — a textbook example of compound growth.

Any minor with earned income can have a Custodial Roth IRA. There is no minimum age — a 5-year-old who legitimately earns money from a paid acting role can qualify, just as a 15-year-old with a summer job can.

What counts as earned income:

• Wages from a W-2 job
• Tips and salaries
• Self-employment income (babysitting, lawn mowing, tutoring, freelance work)

What does not count:

• Allowance from parents
• Birthday or holiday gift money
• Investment income, interest, or dividends
• Scholarships or stipends not tied to work

Keep clear records of the child's earned income — including invoices, payment logs, or pay stubs — in case the IRS asks for documentation.

The annual contribution limit is the lesser of:

• The child's total earned income for the year, or
• The IRS annual Roth IRA contribution limit ($7,000 for 2024 and 2025 for individuals under 50).

If a child earns $1,500 mowing lawns over the summer, the maximum contribution that year is $1,500 — not the full IRS limit. If they earn $10,000, the contribution is capped at the annual IRS limit.

Once a child has earned income, the contributions don't have to come from the child's own paycheck. A parent or grandparent can gift the money to fund the contribution — as long as the total contributed does not exceed the child's earned income or the annual limit.

• Decades of tax-free growth. Money invested at age 15 has 50+ years to compound before traditional retirement age.
• Tax-free qualified withdrawals. Distributions in retirement come out tax-free.
• Contributions can be withdrawn anytime. The amount originally contributed (not the earnings) can be taken out at any time, tax- and penalty-free.
• Flexibility for education and first home. Earnings can be used for qualified higher-education expenses or up to $10,000 for a first home purchase without the 10% penalty.
• Financial education. Involving a child in the process introduces saving, investing, and long-term planning early.

• Earned income is required. Without a job, a child cannot contribute — gifts and allowance don't qualify.
• Recordkeeping matters. You'll want documentation of the child's income in case of an IRS audit.
• Account transfers at the age of majority. Once the child reaches 18 or 21, they have full control — including the ability to withdraw funds.
• May affect financial aid. Retirement account balances are generally not counted on the FAFSA, but distributions can be counted as income in the following year.
• Annual contribution limits are modest relative to other long-term goals — most children won't max out the IRS limit.

A UTMA account is the most common comparison. The two accounts solve different problems:

• Earned income required? Roth IRA: yes. UTMA: no.
• What can be contributed? Roth IRA: cash up to earned income / IRS limit. UTMA: cash, securities, and other gifts with no contribution cap.
• Tax treatment: Roth IRA grows tax-free. UTMA earnings are taxed at the child's rate (with some "kiddie tax" rules).
• Use of funds: Roth IRA is intended for retirement, with limited early-use exceptions. UTMA funds can be used at any time for anything that benefits the child.
• Control: Both transfer to the child at the age of majority.

Many families use both: a UTMA for general long-term growth and gifts, and a Custodial Roth IRA once the child starts earning. See our full comparison in best investment accounts for kids.

A Custodial Roth IRA is a powerful retirement tool — but it only works once a child has earned income. For everything before that point (and for the gifts that don't qualify as earned income), families often use a custodial brokerage account like a UTMA.

KinderShares helps families turn birthday and holiday gifts into long-term investment contributions for a child — giving compounding the one thing it needs most: time. When the child later starts earning income, those habits and accounts already in place make funding a Custodial Roth IRA a natural next step.

See how a head start grows with the Newborn Investment Growth Calculator or read how to invest gifts for your child.

This page is educational only and not tax, legal, or investment advice. Contribution limits, age of majority, and tax treatment vary by year and by state — confirm current IRS rules and consult a qualified advisor before opening any account.