The Retirement Benefits of a Custodial Roth IRA for Kids

Saving for retirement is a decades-long journey that the average American doesn’t begin until age 31. Those who wait for a stable career or “perfect” timing to start saving may find themselves behind the eight ball when it comes to their long-term retirement goals.

So, how early should you start saving for retirement? The answer is, as soon as possible. Thankfully, with a custodial Roth IRA, parents can help their children get a jumpstart on this powerful savings technique from a surprisingly young age. Read on to learn more.

What Is a Custodial Roth IRA?

A custodial Roth IRA is simply a Roth IRA opened for a minor child. It functions in the same way a standard Roth IRA does, with one major difference: A custodial Roth IRA is controlled by the child’s guardian until they reach age 18 or 21, depending on the state.

Like other Roth IRAs, custodial Roth IRAs allow for after-tax contributions that grow tax-free. One benefit of a custodial Roth IRA is that parents can contribute to the account on their child’s behalf, if certain conditions are met. Note that contributions made by parents are subject to the annual gift tax exclusion, which is $18,000 per person in 2024.

The Fine Print: Custodial Roth IRA Requirements

A few requirements must be met to open and fund a custodial Roth IRA.


There is no minimum age requirement to open a custodial Roth IRA for your child. If your child has earned income, they are eligible to open and fund this type of account, regardless of age.

Contribution Limit

The maximum Roth IRA contribution limit is $7,000 per child in 2024; however, the total contribution is limited by how much the child earns during the calendar year.

For instance, if your child earns $2,000 pre-tax from babysitting throughout the year, their Roth IRA contribution is limited to that amount—and it may be funded by the child, a parent, relative, friend, or a combination of these folks, as long as the contribution does not exceed the total earned income.

Earned Income

Earned income is a term defined by the IRS that refers to wages, salaries, tips, and other taxable pay received as an employee, as well as net earnings from self-employment. Having earned income does not necessarily mean a tax return must be filed. In fact, a tax return is only required if your child’s earned income exceeds the standard deduction limit, which is $14,600 for the 2024 tax year.

Keep in mind that even though a tax return isn’t required, it may be a good idea to file one anyway if your child also receives unearned income and is subject to the “kiddie tax” rules. For more information about the kiddie tax, refer to IRS Publication 929.

For parents who own a business, you may be able to save on employment taxes if you hire your child as an employee. In this case, you may not owe FICA tax if the child you employ is under age 18, and no federal unemployment tax is owed on their salary until they reach age 21.

Contribution Deadline

A custodial Roth IRA can be funded up until the tax filing deadline, which means contributions can be made until April 15 of the following calendar year. The benefit of opening an account sooner rather than later is that contributions have more time to grow the longer they’re invested in the market, and kids may be motivated by seeing their hard-earned dollars grow (although there are no guarantees that the market will go up in any given year).

Is a Custodial Roth IRA the Right Choice for Your Child?

Many parents love the idea of helping their children save for the future but wonder if a long-term retirement account is the best way to accomplish this goal. As a retirement account, a custodial Roth IRA is subject to an early withdrawal penalty, which means distributions are assessed a 10% penalty tax if they are deemed early (before age 59 ½) or nonqualified. Here are some important points to know about qualified versus nonqualified Roth IRA distributions before you decide to contribute.

Qualified Distributions

A qualified distribution from a custodial Roth IRA is one that is made after the account holder has reached age 59 ½ and after the account has been open for at least 5 years. A penalty may apply if either of these requirements is not met; many exceptions to the penalty rule exist that still make these accounts appealing to young savers.

Exceptions to the 10% Penalty

After-tax contributions made to a custodial Roth IRA can be withdrawn by the account holder at any time tax-free and penalty-free after the age of 18.

If a distribution consists of contributions and earnings, and it is taken prior to age 59 ½ and/or before the account has been open for 5 years, only the earnings portion of the distribution may be subject to income tax and a 10% penalty.

Withdrawals of earnings from a custodial Roth IRA open more than 5 years with an account holder younger than 59 ½ can avoid income tax and penalties if the account holder passes away or if the funds are spent on:

    • A qualified first-time home purchase (up to $10,000)
    • Disability-related expenses

Withdrawals of earnings from a custodial Roth IRA open less than 5 years with an account holder younger than 59 ½ can avoid penalties, but not income tax, if the account holder passes away or if the funds are spent on:

    • Qualified education expenses
    • A qualified first-time home purchase (up to $10,000)
    • Qualified expenses related to a birth or adoption
    • Disability-related expenses
    • Unreimbursed medical expenses

With these exceptions, a custodial Roth IRA can be a particularly powerful tool in helping children with earned income save for retirement.

Financial Planning & Investment Education at JLFWealth

At JLFranklin Wealth Planning, we act as the personal CFO for our clients. Beyond creative wealth management and tax mitigation, we take pride in helping our clients navigate financial planning and investment education for their children too. If you’d like to learn more about how we help our clients preserve and protect their wealth for generations to come, click here to schedule a consultation today.