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Custodial Roth IRA: How and Why to Start a Roth IRA for Kids


With a custodial Roth IRA, you can help your child start saving for retirement as soon as they start earning income. Because contributions to Roth IRAs are made with after-tax money and can be withdrawn at any time, these accounts are a great option for setting your child up for long-term financial success.

What is a Roth IRA custodian?

A custodial IRA allows the account holder (in this case, your child) to contribute after-tax dollars to retirement. For the most part, a custodial Roth IRA works the same way as a regular Roth IRA.

There is one main difference between these two types of accounts: Because custodian Roth IRAs involve minors, they must have a parent (or other adult) designated as the custodian.

Rules for Roth IRA Custodians

If you know how Roth IRAs work, you already understand the basic rules of Roth IRA custodians. But there are also specific rules that apply to accounts for minor children. Here’s what you need to know.


To qualify for a custodial Roth IRA, your child must earn income. It doesn’t matter if they work for an employer or provide services like childcare. As long as the child is making money and paying taxes on it, they can contribute to a Roth IRA in custody.

Contribution ceilings

For 2022, the contribution limit for Roth IRAs in custody is $6,000 or the total amount of money your child earned during the year, whichever is lower. If, for example, your daughter earned $4,000 as a lifeguard, she could contribute up to $4,000 to her custodial Roth IRA this year.

Tax implications

Custodial Roth IRAs are funded with your child’s after-tax dollars. When they’re ready to withdraw the money for retirement, they won’t pay income tax (unlike traditional IRAs).

Switch to a Traditional Roth IRA

While your child is still under 18, you will manage all assets in the account. But when your child reaches the legal age in your state (usually 18 or 21), their custodial Roth IRA will need to be converted to a regular Roth IRA in their name. Before this happens, make sure your child understands what’s going on and knows how to continue contributing to their account.


Ideally, your child will not need to make any withdrawals from their account until they reach retirement age. But even if they decide to withdraw money before that date, they will not suffer any penalty for withdrawing their contributions. However, taxes and penalties may apply if they draw on their income before retirement.

Types of IRAs for Children

There are other options for children to consider than Roth IRAs. You could, for example, choose to open a traditional IRA for your child. In this case, all account contributions and earnings would be paid with pre-tax dollars. Therefore, your child will have to pay taxes when they withdraw money from the account in retirement.

That said, it’s hard to justify choosing a traditional IRA over a Roth IRA for kids. This is because traditional IRAs are designed for people in the higher tax brackets, offering beneficial tax deductions upfront. In almost all cases, this situation does not apply to children, who usually only earn small amounts of money from their work.

How to open a Roth IRA for your children

Ready to open a Roth IRA custodian? Your first step is to choose a supplier. There are a handful of financial institutions that offer these types of accounts, including Fidelity and Charles Schwab. Take the time to research their offerings and find the best Roth IRA for your needs.

After choosing a company, opening your online account only takes a few minutes. You will need to provide some basic information about yourself and your child, including social security numbers, employment details, annual income, and banking information.

Once your account is set up, work with your child to determine the amount and frequency of their contributions. You can “match” your child’s contributions, as long as your combined contributions don’t exceed the amount of money they earned that year.

The benefits of opening a Roth IRA for your children

To review, here are some of the great benefits that these accounts offer children:

  • Roth Custodial IRAs will grow your children’s money for decades: By contributing to their retirement savings early, your child will enjoy decades of tax-free compound growth. Eventually, they will find themselves with a comfortable nest egg to support them after they stop working.
  • They teach your children how to save for retirement: Many people don’t recognize the importance of planning for retirement until they reach adulthood. With a Roth IRA Custodian, you can help your children establish good financial habits from an early age.
  • Accounts can also be used for other important life events: Ultimately, Roth IRAs are designed for retirement savings. But your child can also withdraw money, without penalty, for other purposes, including emergencies, school fees and buying a home.

Custodian IRA vs Traditional IRA

A custodial IRA can be a Traditional or Roth IRA, and as such will have to follow the rules of whichever you choose. Roth IRAs might be the best choice for children, as they allow them to avoid the tax hit once distributions begin.

Roth IRAs and custodian Roth IRAs are funded with after-tax money. This setup means your contributions can always be withdrawn at any time, tax-free and without penalty. Earnings in the account, however, will be subject to penalty and taxes, if withdrawn before retirement age.

With traditional IRAs and traditional custodial IRAs, the money comes in before tax and is then taxed on the distribution. This type of deposit account means you defer taxes at an unknown rate in the future, and may or may not be advantageous, depending on future circumstances. Traditional IRAs are useful for reducing taxable income, but may not be the most efficient use of a custodial investment account, since most children earn little income and therefore pay little tax.

At the end of the line

Custodial IRAs are a great way to ensure your children have a financial head start at an early age. Many adults realize the importance of retirement planning too late, but by using a custodial account, you can teach your children some important investment principles now.

To note: Bankrate’s Georgina Tzanetos contributed to a recent update of this story.