Roth IRA for Kids: How Parents Can Help Children Start Investing Early
Time is one of the most valuable ingredients in long-term investing, and children have more of it than anyone. A Roth IRA for kids, usually opened as a custodial Roth IRA, gives a working child the chance to start tax-free growth decades before their peers. For parents, grandparents, and business owners, it can also be a meaningful way to teach saving, investing, and the value of work.
The rules are straightforward but strict. A child must have earned income, annual limits apply, and the account must be managed by an adult custodian until the child reaches the age of majority under state law. If you are thinking about opening one as part of a broader family plan, a complimentary, no-obligation wealth and tax review can help you see how it fits with education savings, gifting, and your own tax picture.
How a Roth IRA for Kids Works
A custodial Roth IRA works much like an adult Roth IRA. Contributions are made with after-tax dollars, investments can grow without annual taxation, and qualified withdrawals in retirement are generally tax free. The difference is ownership and control: the account belongs to the child, but a parent or other adult acts as custodian, making investment decisions and managing contributions until control passes to the child.
Key features include:
Earned income required: the child must have compensation from work, such as wages from a job or net earnings from self-employment.
Contribution cap: contributions cannot exceed the lesser of the child's earned income for the year or the annual IRS limit, and annual limits apply.
Who can fund it: the money does not have to come from the child's own paycheck. A parent or grandparent can gift the contribution amount, as long as the child has enough earned income to support it.
Flexibility: contributions (not earnings) can generally be withdrawn at any time without tax or penalty, though doing so reduces the long-term benefit.
What Counts as Earned Income
Earned income is the most common sticking point. Allowances, gifts, and investment income do not qualify. Qualifying income may include:
Wages from a part-time job at a store, restaurant, or summer camp.
Self-employment income from babysitting, lawn mowing, snow shoveling, tutoring, or similar work.
Wages paid by a family business for legitimate work performed.
For informal self-employment, keeping a simple log of dates, clients, and payments can help document the income. Depending on the amount, the child may need to file a tax return and could owe self-employment tax. Families in Waukesha, Appleton and La Crosse often find that a brief conversation with a tax professional clears up these filing questions early.
Hiring Your Children in a Family Business
Business owners have a unique opportunity. Paying a child reasonable wages for real work (such as filing, cleaning, social media help, or inventory) can create earned income that supports Roth contributions. The business may be able to deduct those wages, and the child's income may be taxed at a low rate or not at all, depending on the amount and the standard deduction.
Certain payroll tax exceptions may apply depending on how the business is organized and the child's age. Wages must be reasonable for the work performed, and good records matter: timesheets, job descriptions, and payroll documentation. Clean bookkeeping through client accounting services can make this easier to support. Our article on financial planning for business owners covers how family employment can fit into a broader plan.
Investing the Account
Because a child's time horizon may span many decades, a custodial Roth IRA is often invested for long-term growth. Broad, diversified, low-cost funds are a common starting point. As the child gets older, the account can become a teaching tool: reviewing statements together, discussing how markets rise and fall, and explaining why staying invested matters.
To illustrate how small, early contributions might grow over long periods, you can try the Compound calculator. Results are hypothetical and are intended for education, not as a projection of future returns.
Thoughtful wealth management can also coordinate the child's Roth with the family's overall investment strategy, so asset choices and risk levels are consistent across accounts.
Roth IRA vs. Other Ways to Save for Children
A custodial Roth IRA is not the only option, and it is often used alongside others:
529 plans: designed for education costs, with potential state tax benefits. Our guide to Wisconsin's Edvest 529 plan explains how they work.
Custodial brokerage accounts (UTMA/UGMA): flexible, but earnings may be subject to kiddie tax rules and the assets count more heavily in financial aid calculations.
Direct gifts or trusts: useful for larger transfers and longer-term family goals.
Roth IRA assets are generally not reported as assets on the federal financial aid application, though withdrawals can count as income. That detail may be worth discussing if college is on the horizon.
A Hypothetical Family Example
Imagine a hypothetical family in Oshkosh that owns a landscaping company. Their teenage son works weekends during the season, handling equipment cleanup and customer follow-up. The business pays him a reasonable hourly wage through payroll, and his parents gift an amount equal to part of his earnings into a custodial Roth IRA each year, letting him keep the rest of his paycheck for spending and short-term goals. Their tax advisor reviews the wages and filings annually, while the investment account is managed as part of the family's broader plan.
Start the Conversation About Your Family Plan
A Roth IRA for a child can be a simple, powerful first step toward lifelong financial confidence. Compound's wealth management and tax planning and preparation services are designed to help families in Milwaukee, Madison, Eau Claire and throughout Wisconsin and surrounding areas connect these decisions with their larger goals. To explore your options, request a complimentary wealth and tax review.
Frequently Asked Questions
Is there a minimum age for a Roth IRA for kids?
There is generally no federal minimum age to open a Roth IRA for kids. The key requirement is earned income, so a young child with legitimate wages, such as from modeling or a family business, could qualify. Some financial institutions set their own policies for custodial accounts, so it may make sense to confirm requirements with the provider before opening one.
Can parents contribute to a child's Roth IRA?
Yes. Parents, grandparents, or others can give the child money for contributions, as long as total contributions do not exceed the child's earned income for the year or the annual limit, whichever is lower. The gift counts as the child's contribution. Keeping records of the child's earnings helps support the contribution amount if questions arise later.
Does my child need to file a tax return?
It depends on the amount and type of income. A child with only modest wages may not be required to file, though filing can still be useful for documentation. Self-employment income can trigger a filing requirement at lower levels because of self-employment tax. A tax professional can review your child's situation and help determine what is required each year.
What happens when the child reaches adulthood?
When the child reaches the age of majority under state law, control of the custodial Roth IRA generally transfers to them. At that point, they decide how it is invested and used. Teaching children about the account's purpose and long-term value beforehand can help them make informed decisions once they take over full ownership of the assets.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
Compound Wealth is an integrated tax, wealth management, accounting, and business transition firm serving business owners, professionals, real estate investors, and families. Rather than viewing financial decisions independently, the firm takes a coordinated approach that considers how tax planning, wealth management, accounting, and long-term planning often intersect. This planning-first philosophy helps clients evaluate financial decisions within the context of their broader objectives.
