A custodial Roth IRA is a powerful financial tool that allows parents, guardians, and grandparents to help children begin saving for retirement at an early age.
Unlike traditional savings accounts, this type of IRA offers long-term growth potential and tax advantages that can benefit kids of any age who earn income.
This overview aims to demystify the custodial Roth IRA while helping you make informed decisions about your child’s financial future. You can also find useful information by watching our June 2025 webinar, “Raising Financially Savvy Kids: Tips for Every Age.”
What is a custodial Roth IRA?
A custodial Roth IRA for kids is a retirement account opened by a parent, guardian, or grandparent, who acts as the custodian. It operates similarly to a traditional Roth IRA which can also give your child a head start for long-term financial success. The key difference is that the minor cannot manage the custodial IRA account until they reach the age of majority, which is typically 18 or 21, depending on the state.
The custodian oversees the account, making investment decisions and ensuring compliance with IRS rules. Once the child reaches the designated age, they assume full control of the account. This arrangement allows minors to benefit from early investment growth while also learning financial responsibility.
| Example:
Sally, a professional photographer, regularly features her 5-year-old son, John, in promotional materials for her photography business — such as social media posts, brochures, and website banners. Because John’s image is being used commercially, Sally decides to compensate him as a child model, which is a legitimate form of earned income under IRS guidelines. Sally pays John a reasonable market rate for child modeling services, based on what similar professionals would pay for comparable work. She documents the payments through her business accounting system and issues a W-2 or 1099 depending on the structure of her business. Sally files a tax return for John each year, reporting the modeling income. She opens a custodial Roth IRA in John’s name and contributes up to the amount of his earned income, say, $1,500 for the year. This setup allows John to begin building retirement savings at a very young age, with the added benefit of tax-free growth over decades. |
Roth IRA vs. Custodial Roth IRA vs. 529 Plan
When planning for your children’s future, you may typically think about Roth IRAs, custodial Roth IRAs, and 529 plans.
Here’s a quick view of the distinct advantages of each of these accounts:
- Roth IRA: Ideal for adults or teens with earned income, offering tax-free growth and withdrawals in retirement.
- Custodial Roth IRA: Designed for minors with earned income, providing similar benefits to a Roth IRA but with parental oversight. May impact financial aid for college.
- 529 Plan: Tailored for education savings, allowing tax-free withdrawals for qualified education expenses. Also has a unique, higher annual gift tax exclusion.
If your family is focusing on saving for a child’s retirement, a custodial Roth IRA account could be a viable option. Prioritizing education funding may mean a 529 plan is more suitable, but newer rules on rolling unused 529 funds into a Roth IRA have made them more flexible. Roth IRAs can also be used for qualified education expenses, making them a versatile option.
Trump Accounts
The H.R. 1 bill — also known as the One Big Beautiful Bill Act — introduced “Trump Accounts” which are due to be available July 4, 2026.1 The IRS has not yet finalized account rules, but the Act included details on some features.
Accounts are pre-funded by the government with $1,000 each for qualified U.S. children born in years 2025 to 2028. The child and their family or friends can contribute $5,000 per year (which is not tax deductible). The child’s employer can contribute up to $2,500 per year, as part of the $5,000 limit. Investment options are limited to index funds.
When they reach age 18, the child can access the account. The funds can likely be used for a first-time home or business startup. Withdrawals will incur regular income tax, unlike Roth IRAs, custodial Roth IRAs, and 529 plans. If there are any penalties for early withdrawals, they have not been determined yet.
While the Trump Account offers a unique federal match and employer contribution potential, it lacks the flexibility and tax advantages of a 529 or Roth IRA, especially for families focused on education or long-term retirement planning.
Custodial Roth IRA rules and requirements
To open a custodial Roth IRA, a child must have earned income — meaning they’ve worked and received compensation for services rendered. There’s no minimum age requirement set by the IRS, so even very young children can have a custodial Roth IRA as long as they meet the earned income criteria.
For 2025, the annual contribution limit is $7,000 or the total earned income, whichever is less. Contributions are made with after-tax dollars, and withdrawals are tax-free if the account has been open for at least five years and the account holder is 59½ or older.
Early withdrawals may incur penalties unless used for qualified education expenses or a first-time home purchase. Understanding these custodial Roth IRA rules is essential for maximizing benefits and avoiding unexpected tax consequences.
| Example: Ava is a 15-year-old who sells cupcakes and cookies at her local farmers market. She earns $2,000 in net income after expenses. Her parents opened a custodial Roth IRA in Ava’s name. Ava qualifies to contribute up to $2,000 to the account (the lesser of her earned income or the annual contribution limit, which is $7,000 in 2024). They deposit the full $2,000 into the account and, over time, Ava’s contributions combined with compounding growth could amount to significant savings by the time she retires. |
How to set up custodial Roth IRA for children
Setting up a custodial Roth IRA involves four main steps:
- Choose a provider: Look for a reputable financial institution that offers custodial Roth IRAs with low fees and diverse investment options.
- Gather documents: You’ll need the child’s Social Security number, proof of earned income, and identification for both the custodian and minor.
- Open the account: Complete the application online or in person, designating the custodian and minor.
- Fund the account: Make contributions based on the child’s earned income.
Eligible investments and growth potential
Custodial Roth IRAs can be invested in a wide range of assets, including mutual funds, ETFs, and index funds. These options provide diversification and long-term growth potential.
The real power of a custodial Roth IRA lies in compounding, when you keep earning money on the investment returns of contributions. Starting early means even modest contributions can grow significantly over time, giving your child a head start on retirement savings.
For example, let’s say the fictional 15-year old Ava and her parents contribute her earnings of $2,000 per year into her custodial Roth IRA until she’s age 25. If we assume an average annual return of 7% compounded annually on the account’s investments, her total contributions at age 25 will be $22,000. Even if she doesn’t contribute any more money after turning 25, her account will continue to have compound growth. When she reaches age 65, the untouched final balance, in this scenario, will be $505,790.80.
Tax advantages and considerations
One of the biggest benefits of a custodial Roth IRA is tax-free growth and withdrawals. Contributions are made with after-tax dollars, so qualified distributions are not taxed. This approach can result in substantial savings over the long term.
However, custodial Roth IRAs may impact financial aid eligibility. Assets in the child’s name are considered when calculating FAFSA, potentially reducing aid. Additionally, custodial fees may apply, though they are generally not tax-deductible. Your family should weigh these considerations and consult with your wealth advisor to understand the implications for your taxable estate and overall financial plan.
Pros and cons of a custodial Roth IRA
| Pros | Cons |
| Long-term growth through compounding | May reduce financial aid eligibility |
| Tax-free withdrawals for qualified expenses | Contributions are irrevocable |
| Encourages financial literacy and responsibility | Child gains control at age 18 or 21, which may not align with parental intentions |
Understanding the pros and cons helps families decide whether a custodial Roth IRA for kids is the right choice. It’s important to consider goals like saving for education and housing and preparing for retirement.
Is a custodial Roth IRA right for your family?
Custodial Roth IRAs offer a distinct opportunity to invest in your child’s future. They can be best suited for families with children who have earned income and want to set long-term financial goals. Key decision factors include your child’s income, your savings timeline, and your overall financial strategy.
Before opening an account, speak with your wealth advisor to ensure it aligns with your family’s needs. With the right guidance, a custodial Roth IRA can be a valuable tool for building wealth and teaching financial responsibility.
Not a Mercer Advisors client and want to know if a custodial Roth IRA is right for your family? Let’s talk.
1.“$1K Trump Accounts Are Coming: Experts Weigh In on Who Qualifies, Benefits and Drawbacks.” U.S. News, Aug. 14, 2025.
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