Opening a Roth IRA for your child can be a huge headstart

Quick Summary

  • You can open a Roth IRA in a child’s name to help him or her save for retirement, a first house or, subject to some rules, educational expenses.
  • Children must have earned income in order to have a Roth IRA in their names.
  • The kids generally won’t owe taxes on the money when they withdraw it, no matter how much they have earned in the account over the years.


Many people ask, “Can I open a Roth IRA for my kid?” The answer is broadly, “yes,” and it’s getting easier. A handful of brokerages, including Fidelity and Schwab, now offer Roth IRAs for kids. Adults, usually a parent or grandparent, control them, but the account is opened in a child’s name. When the child becomes an adult, he or she assumes control of the account. It seems a long time off, but it can give your child a great start on retirement accounts and teach the value of saving. In addition, under certain circumstances, the money can be used to buy a house or fund educational expenses or in an emergency.

The bonus: If you open a Roth IRA for a child, the money has a longer time to grow, benefiting from compound interest. That can make a big difference. If you make a single, one-time contribution to a child’s Roth IRA when they are 15, for example, that will turn into more than $160,000 tax free when they are 65  (assuming a 7 percent annual return). If they waited until they were 35 to contribute to a Roth, they would need to save $22,000 to reach that same amount.

In this article, we’ll cover:

Eligibility Rules

The most important thing to know about opening a Roth IRA for a child is that they must have earned money during that tax year. You (or the child) can contribute as much as they made, up to the annual Roth IRA limit (currently $5,500). The same rules that decide eligibility for Roth IRAs apply to the account you open for your child. You or another adult will be the custodian on the account, but the child will be the owner.

It’s up to you (or the child) to document that they had income earned from work. The money can’t be an allowance or a gift. (You can find more about the IRS’s definition here). It’s up to the account custodian to document the service rendered, when it was done, and the payment. It also has to be a reasonable rate. You can’t pay $1,000 for a night of babysitting.

However, the contribution you make to your kid’s Roth IRA can be a gift from you or someone else. Remember to consider the IRS’s gift tax rules. The contributions you make to a Roth IRA for your kid will count against the limit on tax-free gifts you can make to one person, which is $15,000 for 2018 and 2019.

How to Open a Kid’s IRA

You can open a custodial IRA at many brokerages. Fidelity has begun marketing a Roth IRA for Kids that includes supporting marketing material to help guide you. Look for a $0 fee on the account, and a low or $0 account minimum. You will probably have a small fee of less than $10 for each trade, and should aim to keep the number of trades as small as possible.

Fidelity’s account has no minimum. “We saw a real uptick in requests for this two-three years ago,” says John Boroff, director of retirement product management at Boston-based Fidelity Investments. “I think it could be uncertainty around the future of Social Security … and more awareness of Roth IRAs.”

Investing in a Roth IRA

In a custodial Roth IRA, or a Roth IRA for kids, the adult controlling the account is the only person who can make investment decisions. There are three ways to approach investing in a Roth IRA:

  • Design the portfolio yourself
  • Buy a target-date or lifecycle fund that automatically adjusts as your child grows
  • Consult a financial advisor, either one who works at your brokerage or an independent one

If you begin your kid’s Roth IRA with a small amount, like $500, you may need to wait to buy certain funds. Some mutual funds have a $2,500 minimum, according to Boroff.

Remember, the big benefit of a Roth IRA is that whatever money account holders earn from their investments won’t be taxed when they withdraw it. That benefit is subject to one restriction, however: The money must be held in the account for at least five years to get the full tax benefit.

What the Money Can Be Used For

After the child who owns the account is 18 (or 21 in some states), you can take steps with your brokerage to shift the account into your son’s or daughter’s control. As long as the account has been open for five years, they will have options for how to use the money.

  • For retirement savings. The owner (the child who has grown up!) can withdraw the money after age 59½. No taxes will be owed on the earnings.
  • To buy a house. The owner can withdraw funds to buy a house before reaching 59½. The money must be used as a down payment for closing costs. The withdrawal is limited to $10,000. Early withdrawals for a home purchases are penalty and tax free.
  • For education expenses. The owner can withdraw money for college, but they will pay taxes on the earnings. However, there is no 10 percent early withdrawal penalty if the money is used for qualified education expenses (tuition, fees, books, supplies, equipment and most room and board charges).
  • For emergencies. The owner of a Roth IRA can withdraw money in an emergency. But the withdrawal will be subject to taxes on the earnings, plus a 10 percent early withdrawal fee.

How to Use a Roth IRA to Teach Kids About Money

It’s hard for some kids to save money that they have earned when they would rather be spending it on games, movies or clothes. Some parents make contributions to their child’s Roth IRA as a reward or match for the money earned in a summer job or over the year.

A Roth IRA for kids offers a chance to reinforce the value of earning money and to show kids that you value saving for the future. “It’s really about teaching them about saving for the long haul,” Boroff says.

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