Saving for your child's future doesn't have to be complicated. If you're looking for a way to help your child's money grow over time, a Roth IRA for kids is one smart option.

These accounts offer the advantage of tax-free growth, which is a great way to build wealth for the long term.

A Roth IRA for kids works just like a regular Roth IRA but is specifically designed for children who have earned income from jobs like lawn mowing or dog walking. This allows them to start saving early and continue contributing as they earn more.

In this blog, we'll explain how these accounts work, why they're a great choice for kids, and how to open one for your child.

Key Takeaways

• Roth IRAs for kids let them save money they earn from jobs tax-free for the future. In 2025, kids or their parents can contribute up to $7,000 a year into these accounts.​
• The money in the Roth IRA grows without paying taxes on it. Kids can take out what they put in anytime without a penalty but must follow rules for earnings withdrawals.
• To open a Roth IRA for kids, you need proof of the child's job income and some documents like a Social Security number. Choose a financial institution with low fees and good options.
• Having a Roth IRA might affect how much financial aid your child could get for college since it counts as an asset.
• Parents manage the account until their child turns 18 or 21, depending on where they live. This helps kids learn about saving and investing early on.

What Is a Roth IRA for Kids?

This special account operates like any Roth IRA but is designed specifically for children. It allows kids to save money they earn from jobs tax-free for their future. Children can only contribute money they've earned themselves, such as income from summer jobs or babysitting.

A parent or guardian must open this custodial Roth IRA since kids under 18 can't do it alone.

The child's earnings go into the account after taxes have been taken out. Later, when they take out the money for retirement, they don't pay any more taxes on it. Even better, this type of account helps them start saving early and learn about managing money wisely.

How Does a Roth IRA for Kids Work?

A Roth IRA for kids functions like a magic box where after-tax money grows and can be taken out tax-free later. It starts with an adult—usually a parent—opening the account, then the child's earnings get tucked away to blossom over time in custodial Roth IRAs.

Custodial Roth IRA Rules

A Custodial Roth IRA is set up for kids. An adult must manage it until the child reaches a certain age.

• The account is opened by a parent or guardian, known as the custodian.
• Only the child's earned income can be contributed to the account. This means any money made from jobs or self-employment gigs counts.
• Contribution limits for 2025 are $7,000 or the total earned income, whichever is lower.
• Contributions are made with after-tax dollars, which means no tax breaks at the time of deposit.
• The custodian controls investment decisions until the child turns 18 or 21, depending on state rules.
• Kids can withdraw contributions without penalties anytime, but withdrawing earnings before retirement age might incur taxes and penalties.
• The account can grow tax-free over time, benefiting from compound growth.

Contribution Limits and Requirements

Understanding contribution limits and requirements is essential for parents planning a Roth IRA for their children.

• Kids must have earned income from jobs or self-employment gigs to contribute. Only earned income counts, not gifts or allowances.
• The total contribution cannot exceed the child's earned income for the year. For example, if a child earns $1,000, they can only put in that amount.
• As of 2025, the maximum contribution limit is $7,000 per year. This limit may change over time.​
• Contributions to a Roth IRA are made with after-tax dollars. This means taxes are paid before money goes into the account.
• Unlike traditional IRAs, contributions to a Roth IRA aren't tax-deductible. Parents should keep this in mind for their tax returns.
• Account fees may apply depending on the financial institution chosen. It's wise to check these before opening an account.
• If a child qualifies under special conditions like college tuition expenses, they can withdraw contributions without penalties. These are known as qualified distributions.

These rules help shape how children can save early for retirement through a Roth IRA.

Benefits of a Roth IRA for Kids

A Roth IRA for kids offers tax-free growth on savings. This means their money can grow without being taxed, giving them a great start for retirement.

Tax-Free Growth

Money in a child's Roth IRA grows without taxation, which offers particular advantages given that children typically have minimal income taxes. Kids can use after-tax dollars to contribute, up to the limit of their earned income for the year, which helps them save more effectively in the long run.

Since they typically earn less income, most kids fall into a lower tax bracket. Their earnings can compound over time without worrying about taxes.

With this account, children build savings early. They benefit from the average annual return on investments. Tax-free growth is a big perk of using a child's Roth IRA for retirement planning.

It encourages smart financial habits from an early age while offering future advantages like penalty-free withdrawals when needed.

Early Start for Retirement Savings

Beyond tax-free growth come additional benefits. Opening a Roth IRA early gives kids a valuable head start on retirement savings, making it one of the most beneficial retirement accounts they can have. The money grows over decades, making it easier to reach long-term goals. Since contributions come from after-tax dollars, they won't face taxes later when withdrawing funds.

Kids benefit tremendously from starting young with their retirement accounts. They can continue contributing even with small amounts from self-employment gigs or gifts from generous relatives.

With time and steady contributions, their money has the chance to grow tax-free—an advantage not many get later in life!

Emergency Access to Contributions

A Roth IRA for kids allows funds to remain accessible if needed. Your child can withdraw their contributions anytime without penalties. However, withdrawing earnings before age 59½ could result in taxes and penalties unless specific exceptions apply. This differentiation ensures clarity on potential tax implications when accessing funds.

Parents often set up a custodial IRA for their child. If there's an urgent need or a big expense, they can easily take out the money they contributed. It gives families peace of mind knowing that their child's savings are available if necessary.

How to Open a Roth IRA for Kids

Opening a Roth IRA for your child requires gathering specific documents and selecting an appropriate financial institution that offers this type of account.

Eligibility and Documentation

Setting up a Roth individual retirement account for kids requires meeting specific criteria and providing proper documentation.

• A child must have earned income from a job or self-employment gigs. This includes babysitting, lawn mowing, or part-time jobs. The total annual contribution limit to the Roth IRA is the lesser of the child's earned income or the IRS maximum contribution limit for the year.
• Only earned income counts toward contributions. Gifts or allowances, which are not considered earned income, cannot be used to fund the account.
• Many parents serve as the IRA custodian for their child's Roth IRA. They manage the account until the child reaches legal adulthood, which is typically 18 or 21 years old, depending on state laws.
• Documentation includes proof of the child's income, which may be pay stubs, tax documents like an income tax return, or a written log of earnings for self-employment activities, detailing dates, services rendered, and amounts received.
• Financial institutions may ask for identification like a Social Security number and birth certificate.
• Finding a suitable financial institution is key. Look for one that offers low fees and good investment options.

Choosing the Right Financial Institution

Selecting an appropriate financial institution is crucial when establishing a Roth IRA for kids. The right choice helps manage the account effectively and make informed investment decisions.

1. Look for low fees. Some banks or firms charge monthly fees. These can eat into your savings over time.
2. Check investment options. Choose a place that offers various investments, like stocks and bonds. This helps grow the account faster.
3. Research customer service reviews. Friendly, knowledgeable staff can help with questions about contributions or withdrawals.
4. Ensure they offer online access. Being able to view the account online makes tracking Roth IRA contributions easier.
5. Verify their reputation and trustworthiness. Research if they are well-rated by financial watchdogs and have positive reviews from clients.
6. Confirm custodial terms are clear. The institution should explain their custodial procedures, including the process for transferring control of the account to the child when they reach the age of majority.
7. Look for educational resources on financial literacy. Some institutions provide tools to help kids learn about managing an IRA account.

Important Considerations

When contemplating a Roth IRA for your child, it's essential to understand potential impacts on financial aid and withdrawal rules.

Impact on Financial Aid

Roth IRA account balances for kids do not appear as assets on the Free Application for Federal Student Aid (FAFSA). However, it is important to note that distributions from a Roth IRA are counted as income on the FAFSA, which can impact financial aid eligibility.

Withdrawals from a Roth IRA are not taxable income, which is good news. However, it's best to consult a tax professional or financial advisor about these details before opening an account.

Qualified Withdrawals

A child's Roth IRA allows for specific withdrawal options without penalties. Contributions can be withdrawn at any time, tax-free and penalty-free. However, earnings have more rules.

To avoid penalties on earnings used for qualified education expenses, it's important to understand that these withdrawals are still subject to income tax if the account owner is under age 59½ and the account has not been open for at least five years. This is crucial for planning as it affects the overall tax situation.

The funds can also be used after reaching age 59½. Opening a Roth IRA early means kids start growing their savings tax-free, unlike a traditional IRA which may have different withdrawal rules.

Conclusion

Roth IRAs for kids offer a powerful financial advantage through tax-free growth potential. Starting early gives children a significant head start on retirement savings while teaching valuable money management skills.

These accounts provide flexibility with penalty-free access to contributions when emergencies arise.

Opening an account requires minimal documentation and finding the right financial institution. This simple step can lead to substantial long-term benefits and improved financial literacy for your child.

FAQs

1. What is a Roth IRA for kids?

A Roth IRA (Individual Retirement Account) for kids is a retirement account that uses after-tax dollars, allowing the money to grow tax-free.

2. How does a Roth IRA work for kids?

Typically, a parent or guardian sets up the account. The child can then contribute income from self-employment gigs, which are made with after-tax dollars and are not tax-deductible.

3. Can withdrawals from a kid's Roth IRA be penalty-free?

Yes, you can withdraw money penalty-free if it's used for specific purposes outlined in IRS publication 590-B. However, these withdrawals may still be subject to income tax if the account owner is under age 59½ and the account has not been open for at least five years.

4. Is there any advantage to starting early with a Roth IRA for my child?

Absolutely! Taking full advantage of time allows contributions to compound and grow tax-free potentially resulting in higher balances over time compared to starting at an older age when one might fall into higher tax brackets.

5. Where can I find more information about setting up and managing a child's Roth IRA?

Financial news outlets often provide updated articles on financial planning topics including child's IRAs. You may also find IRS publications helpful as well as using online resources. Financial advisors can also provide personalized advice based on your unique situation.