Reviewed by the Penny Time editorial team
Part of our Investing hub.
Custodial Roth IRA for Kids: How It Works, Who Qualifies, and What $50/Month Becomes by 18
If your kid mows lawns, babysits, or has a W-2 job at the local ice cream shop, they can open a Roth IRA. Not someday. This year. A custodial Roth IRA is one of the few accounts where time does more work than money, and your kid has more time than anyone.
Here is the plain-English version of how it works, who qualifies, the rules the IRS actually enforces, and what $50 a month becomes by the time your kid graduates high school.
Custodial Roth IRA rules at a glance
Five rules do most of the work. Get these right and the rest is paperwork.
| Rule | What it means |
|---|---|
| Earned income required | The child must have earned income from real work. Allowance, gifts, and birthday money do not count. |
| 2026 contribution limit | $7,500 or the child's earned income for the year, whichever is lower. |
| Who controls it | A parent or guardian manages the account as custodian until the child reaches the age of majority (18 or 21, depending on your state). |
| Who owns the money | The child. Contributions belong to them and transfer to their full control at the age of majority. |
| Withdrawal rules | Contributions come out any time, tax and penalty free. Earnings withdrawn before age 59 and a half can owe income tax plus a 10% penalty, with exceptions like a first home or qualified education. |
One more to know: the five-year rule. The account has to be open for five years before earnings can be withdrawn tax-free in retirement. Opening one early starts that clock now.
What a custodial Roth IRA actually is
A custodial Roth IRA is a regular Roth IRA opened in a child's name, with a parent or guardian listed as the custodian until the kid turns 18 or 21 (depends on your state's UTMA/UGMA rules). The money belongs to the child. The custodian manages it on their behalf.
The Roth part matters. You contribute money that has already been taxed, it grows tax-free, and your kid can pull it out tax-free in retirement. Because most kids pay zero federal income tax on what they earn, the Roth is almost always the right choice over a Traditional IRA.
Who qualifies: the earned income rule
This is the rule that trips up most parents. To contribute to any Roth IRA, the account holder must have earned income for the year. Allowance does not count. Birthday money does not count. Gifts do not count.
Earned income means money paid for work. The IRS is specific about this. Here is what counts:
- W-2 wages from a job (grocery store, restaurant, summer camp counselor)
- 1099 income from self-employment (lawn mowing, babysitting, tutoring, dog walking, lifeguarding)
- Pay from working in a family business, if the work is real and the wage is reasonable
For self-employment income under $400, no tax filing is required, but you should still keep records. A simple log with dates, who paid, what the work was, and how much, is enough. If the IRS ever asks, that log is your proof.
Custodial Roth IRA contribution limits (2026)
The 2026 contribution limit is $7,500 or the child's earned income for the year, whichever is lower (up from $7,000 in 2025). So if your 13-year-old earned $1,800 babysitting, $1,800 is the cap. If your 17-year-old earned $9,000 at a summer job, $7,500 is the cap.
Here is the part parents miss: the money does not have to come from the kid's actual paycheck. You can contribute on their behalf, dollar for dollar up to what they earned. Many families do this as a matching deal. The kid keeps their paycheck, the parent funds the Roth.
What $50 a month becomes
This is where the math gets fun. Assume your kid starts contributing $50 a month at age 10 and stops at 18. That is $4,800 total, contributed over 8 years.
| Age stopped | Total contributed | Value at 65 (7% return) |
|---|---|---|
| Contributes $50/mo from 10 to 18, then stops | $4,800 | ~$173,000 |
| Contributes $100/mo from 10 to 18, then stops | $9,600 | ~$346,000 |
| Contributes $200/mo from 10 to 18, then stops | $19,200 | ~$692,000 |
These numbers assume a 7% average annual return, which is roughly the long-run inflation-adjusted return of the S&P 500 since 1928 (NYU Stern data). Real returns vary year to year. The point is not the exact figure, it is the shape of the curve.
Run your own numbers with our birthday money calculator to see what a single $500 gift could become if invested instead of spent.
How to open a custodial Roth IRA, step by step
Most major brokerages offer custodial Roth IRAs with no minimum and no account fees. Fidelity, Schwab, and Vanguard all do. You will need:
- Your kid's Social Security number
- Your own SSN and ID
- A funding source (bank account)
- A record of the child's earned income (especially for self-employment)
The whole process takes about 15 minutes online. Once open, you pick investments. For a kid with 50+ years of runway, a low-cost total market index fund (like FZROX or VTI) is the boring, correct answer.
The teaching moment
Opening the account is the easy part. The real win is showing your kid what compound growth looks like in their own account, with their own money. Try this script:
"You earned $40 babysitting on Saturday. If you put $20 of it in your Roth IRA today, by the time you're my age it could be worth around $300. By the time you're 65, it could be worth $1,500. That's the same $20, just sitting there doing work for you."
Run the numbers in front of them. Let them pick the investment. Once a quarter, show them the balance. The goal is not to make them rich at 11. The goal is to make compound growth feel real before they start their first full-time job.
Things to watch out for
- The money is theirs at 18 or 21. Depending on your state, your kid gets full control of the account at the age of majority. Talk about this early so they do not cash it out for a car.
- Pay yourself back rules. Contributions (not earnings) can be withdrawn at any time, tax and penalty free. This makes the Roth a flexible backup, not just retirement.
- FAFSA impact is small. Retirement accounts are not counted as assets on the FAFSA, so a Roth does not hurt financial aid the way a 529 or UTMA brokerage account can.
- Document everything. If your kid is self-employed, keep a simple income log. The IRS rarely audits small accounts, but if they do, you want receipts.
Where this fits in the bigger picture
A custodial Roth is not the first money lesson. It is more like the fourth. Before this, kids need a working sense of saving, spending, and the difference between wants and needs. They need to see a savings goal hit. They need to earn money through real work, which is where a structured chore chart or first job comes in.
Once those basics are in place, the Roth IRA conversation lands differently. It is not abstract. It is the next level of a system they already understand.
Frequently Asked Questions
-
Yes. As long as the income is real and documented, even $200 in earned income qualifies. You can contribute up to $200 to the Roth for that year. Keep a simple log of dates, clients, and amounts. Fidelity, Schwab, and Vanguard all open custodial Roth IRAs with no minimum balance.
-
No. The IRS does not consider allowance earned income, even if it is tied to chores. Earned income must be paid by someone other than a parent (or paid by a parent through a legitimate family business with real work and a reasonable wage). Babysitting for neighbors, lawn mowing, and tutoring all qualify.
-
Control of the account transfers from the custodian to the child at the age of majority, which is 18 in most states and 21 in a few (like California and New York). The money belongs to them and they can do what they want with it, including withdrawing contributions tax-free. Talk about long-term goals early so they do not drain it at 18.
-
The 2026 limit is $7,500 or the child's total earned income for the year, whichever is lower (up from $7,000 in 2025). So a kid who earned $1,500 can contribute up to $1,500. A teen with a $10,000 summer job is capped at $7,500. Parents can contribute on the child's behalf up to the earned income amount.
-
Barely. Retirement accounts, including custodial Roth IRAs, are not reported as assets on the FAFSA, so they do not reduce aid eligibility the way a 529 or UTMA brokerage account might. Withdrawals from the Roth during college years can count as income on the following year's FAFSA, so time any withdrawals carefully.
-
Contributions (the money that went in) can be withdrawn any time, tax and penalty free, because it was already taxed. Earnings are different: pull them out before age 59 and a half and you generally owe income tax plus a 10% penalty, unless an exception applies, such as up to $10,000 toward a first home or qualified higher-education costs. The account also has to be open five years before earnings can come out fully tax-free in retirement.
Turn allowance into real money lessons
Penny Time turns allowance into playful Quests where kids make real money decisions and see how each one turns out. Parents stay in charge of every cash-out. Free for the whole family.
No credit card. No ads. No strings.