Generational wealth is not only about what you leave behind. It is also about the head start you give your children while you are still here. One tool more Atlanta parents are asking about is a custodial Roth IRA, a retirement account opened for a child who has earned income from a job.
Here is how a custodial Roth IRA works, who qualifies, how parents can help fund it and the mistakes to avoid.
This article is general education, not tax, legal or investment advice. Rules can change, so confirm the details with a tax professional and the IRS Roth IRA page before you open or fund an account.
What is a custodial Roth IRA?
A custodial Roth IRA is a Roth IRA owned by a minor and managed by an adult custodian, usually a parent or guardian. The money belongs to the child. The custodian makes the investment decisions until the child reaches the age at which the account transfers to them, which depends on state law and the brokerage's rules.
A Roth IRA is funded with money that has already been taxed. In exchange, qualified withdrawals in retirement, including the growth, can come out tax-free. For a teenager who may pay little or no income tax today, that trade can be attractive.
Who qualifies: the earned income rule
This is the rule that matters most. A child can only contribute to an IRA if they have earned income (the IRS calls it taxable compensation). Allowances, birthday money and gifts do not count.
Examples of earned income can include:
- A summer job at a restaurant, store or camp
- Babysitting, lawn care or pet sitting for neighbors
- Work in a family business, when the child does real work for reasonable pay
The contribution for any year cannot be more than the child's earned income for that year, or the annual IRA limit set by the IRS, whichever is less. The IRS explains contribution rules in Publication 590-A. If your 15-year-old earned $2,400 this summer, the most that can go into their IRA for the year is $2,400.
Keep records
Because earned income is the gateway, keep proof: pay stubs, a W-2, or for self-employment work like babysitting, a simple log of who paid, how much and for what. Your tax professional can tell you whether the child needs to file a tax return.
Can parents fund the contribution?
Yes, in many cases. The contribution limit is tied to the child's earned income, not to whose money goes into the account. A parent can choose to gift the contribution while the child keeps their paycheck, or match what the child saves. Matching can be a great way to teach a teen to put part of every check toward the future.
Hiring your child in your business
Many Flex Fuel clients are business owners, and hiring a child can be a real way to create earned income. The IRS has guidance on family help in a small business. Keep it legitimate:
- The work has to be real work the business needs.
- Pay should be reasonable for the job and the child's age.
- Keep time records and payroll records like you would for any employee.
- Follow child labor rules for hours and type of work.
Tax treatment depends on how your business is structured, so walk through it with your accountant before you start. If your business finances and personal finances are still mixed together, fix that first. See our guide on separating business and personal finances.
How withdrawals work
Roth IRAs have flexible rules that make them useful for young savers:
- Contributions (the money put in) can generally be withdrawn at any time without tax or penalty.
- Earnings (the growth) are generally tax-free only if the withdrawal is qualified, which usually means the account owner is at least 59½ and the account has been open at least five years. Some exceptions exist.
That flexibility is helpful, but the real power of a custodial Roth IRA comes from leaving the money alone for decades. Talk with your child about the account as long-term money, not a savings account.
Custodial Roth IRA vs. other ways to save for kids
A custodial Roth IRA is one tool, not the whole plan.
- For college: a 529 plan is built for education costs. See our Georgia 529 Path2College plan guide.
- For general savings: a custodial brokerage or savings account does not require earned income, but it does not carry the same tax treatment.
- For your own retirement: do not skip your own savings to fund your child's. Our guide on opening a Roth IRA while you fix your credit covers the adult side.
How to open a custodial Roth IRA
- Confirm earned income for the year and gather records.
- Choose a brokerage that offers custodial Roth IRAs and compare fees and investment options.
- Open the account with the child's and custodian's information.
- Contribute no more than the child's earned income for the year.
- Pick simple, long-term investments you understand, and review them once or twice a year.
- Bring your child in. Show them the statements and talk about what compound growth means.
Make it part of your family's wealth plan
A custodial Roth IRA works best alongside strong family finances: good credit, an emergency fund, protection like life insurance and a plan for what you leave behind. Our generational wealth starter plan shows how the pieces fit.
How Flex Fuel helps
Flex Fuel helps Atlanta families strengthen their credit and money habits so they can build wealth that lasts. Explore our services and see how our guarantee works.
Want to set up a custodial Roth IRA for your child but not sure where to start? Book a time to talk through your family's money plan with us.
Ready to start building wealth for the next generation? Book a complimentary strategy session to talk through your family's financial plan.
Book a Consultation ›Frequently asked questions
Is there a minimum age for a custodial Roth IRA?
The IRS rule is about earned income, not age. Brokerages set their own policies, so check with the one you plan to use.
Can I put birthday money into my child's Roth IRA?
You can use gifted money to make the contribution, but only up to the amount the child earned from work that year. Without earned income, no IRA contribution can be made.
What happens when my child becomes an adult?
Control of the account passes to the child at the age set by state law and the brokerage. After that, they manage it themselves, which is why teaching them about it early matters.
Does a custodial Roth IRA affect financial aid?
Retirement accounts are often treated differently from other savings in financial aid formulas, but rules vary. Ask the school's financial aid office or a college planning professional.
