Custodial Roth IRA: Planning for your child’s future

When people have children, they often immediately start thinking of how they can set those children up for financial success.

Whether you’re saving for your child’s college education or simply building them a nest egg for the future, starting early is key. It’s also important to choose the right account, and with so many options available, from savings accounts to UTMA accounts and more, it can be challenging to decide on the best option.

One option to help you save for your child’s future is a custodial Roth IRA. This account offers the ability to save for your child’s future, but with greater tax benefits than many other accounts offer. Keep reading to learn more about custodial Roth IRAs and how you can use one to prepare for your child’s future.

What is a custodial Roth IRA?

A custodial Roth IRA combines two beneficial types of accounts: custodial accounts and Roth IRAs.

A custodial account is one that an adult — typically a parent or grandparent — creates on behalf of a minor child. Each deposit into the account is an irrevocable gift to the child. While the child is still a minor, the custodian controls the account and manages the investments in the best interests of the child.

Once the child reaches the age of majority — typically age 18, but 21 in some states — they can take control of the account. At that point, the beneficiary of the account can use it for any purpose.

A Roth IRA is a specific type of retirement account. It allows investors to make after-tax retirement contributions and then enjoy tax-free growth and withdrawals.1

A custodial Roth IRA offers plenty of benefits, including tax-free investment growth and the ability to spend the money for nearly any purpose, including paying for higher education or saving it for retirement.

Why your kid needs a custodial Roth IRA

Custodial Roth IRAs have several important benefits that may make them a great choice for parents who want to save for their child’s future.

Tax advantages

Roth IRAs have some major tax advantages. As we’ve mentioned, contributions to a Roth IRA are made after taxes.  Although there’s no tax benefit on the front end, you can get one after the fact. In other words, you can withdraw the funds tax-free later on. Additionally, the money grows tax-free in the account — there are no taxes on capital gains, dividends, interest, or any other earnings.

These tax benefits can save your child a lot of money later on. Imagine you use a custodial Roth IRA to save for your child’s future and manage to grow it to $100,000. Using a Roth IRA, your child gets to keep that full $100,000. But with another type of account, they would lose thousands to taxes.

Long-term wealth building

Starting to save for your child while they’re young allows you to take advantage of compound interest that will have an incredible impact on their long-term wealth.

Suppose your child starts saving for retirement at the age of 25, saving $250 per month for 40 years. Assuming a 10% annual return, they would retire with more than $1.3 million. But what if you started saving $250 per month for them earlier — let’s say starting at age 15? That extra decade of compound interest would result in more than $2 million more. That’s right — your child would retire with nearly $3.5 million.*

This is thanks to compound interest. In other words, the money from your custodial Roth IRA contributions can earn money. The longer the money has to compound, the more exponential the growth can be.

Read more: How to help your kids build wealth

Financial education and responsibility

Many of us graduated and started our careers with little financial education under our belts. While some states have worked to repair this by requiring financial education in schools, there’s also a lot you can do as parents.

Opening a custodial Roth IRA for your child can help you teach them about financial education and responsibility. You can teach them the importance of putting some of their money into savings. Additionally, you can teach them how investing works and the power of compound interest.

Read more: Why it's important to talk about money with your kids

Gift and inheritance planning

A custodial Roth IRA can help you with gift and inheritance planning in a couple of different ways.

First, contributing to a custodial account for your child allows you to start passing down some of your money when they’re young rather than waiting for them to receive an inheritance when you pass away. After all, the money is likely more beneficial to them earlier in life, when they have little money and some major expenses, rather than later in life, when they’ve probably had a chance to grow a nest egg of their own.

Contributing to a custodial Roth IRA can also help you manage your gift and estate tax liabilities. The IRS imposes taxes on gifts and estates above and beyond a certain dollar amount. By gifting your child some money each year, you reduce the risk of having to pay gift or estate taxes later on.2,3

Contributions can be withdrawn at any time

Unlike many tax-advantaged retirement accounts, you can access the money in a Roth IRA early. Though your child’s investment earnings will still be subject to withdrawal restrictions, the original contributions can be withdrawn at any time tax-free and penalty-free.

In a perfect world, we might never have to withdraw money from our retirement accounts early. But a custodial Roth IRA presents a unique opportunity to save for your child in a tax-advantaged way while allowing them to use the money for short-term goals. Additionally, even if your child doesn’t choose to access the money for earlier expenses, they’ll always have that cash available in case of an emergency.

Read more: How we save and invest for our kids’ future

The money can be used for more than retirement

As mentioned, contributions in a Roth IRA can be withdrawn at any time tax-free or penalty-free. As a result, your child can use the money for more than just retirement. They can access those contributions at any time to pay for large goals, such as going to college, buying a home, starting a business, or traveling the world.

There are also some exceptions to the restrictions on Roth IRA earnings withdrawals. For example, your child can withdraw up to $10,000 of earnings to buy a home with no taxes or penalties.4 They can also use their earnings to pay for higher education without any early withdrawal penalties (though they’ll be subject to income taxes).5

Custodial Roth IRA rules

If you’re considering opening a custodial Roth IRA for your child, there are a few rules to consider to ensure you’re able to maximize the tax benefits and avoid penalties.

Eligibility criteria

To be eligible to contribute to a Roth IRA, the account owner or beneficiary must have earned income, but that income can’t exceed a certain limit.

But here’s the catch: custodial Roth IRA eligibility is based on your child’s income, not yours. That’s right — for you to open and contribute to a custodial Roth IRA on behalf of your child, your child must have earned income of their own, either from a job or another source.

There’s also an income limit for Roth IRA contributions. In 2024, a single person can’t contribute to a Roth IRA if they earn more than $161,000.6 However, given your child’s minor status, it’s unlikely that would be the case.

Contribution limits

The most you can contribute to a custodial Roth IRA in 2024 is the lesser of 100% of your child’s earned income or $7,000 (up from $6,500 in 2023).7

You can contribute to your child’s Roth IRA with your own money — it doesn’t necessarily have to come from your child’s income. However, the amount you contribute can’t exceed your child’s actual earned income.

That income can come from sources such as8:

  • Wages
  • Salaries
  • Commissions
  • Tips
  • Bonuses
  • Self-employment

For example, if your child earns $4,000 at a part-time job, that’s the maximum you can contribute to their Roth IRA. You won’t be able to take advantage of the full $7,000 contribution limit.

Withdrawal rules

We’ve already mentioned that Roth IRA contributions can be withdrawn at any time without taxes or penalties. But that doesn’t apply to Roth IRA earnings. To make tax-free and penalty-free withdrawals of Roth IRA earnings, you must meet the following requirements:

  1. It’s been at least five years since the year of your first Roth IRA contribution
  2. One of the following situations applies:
    1. You’ve reached age 59 ½
    2. You’re disabled
    3. You’re the beneficiary of a Roth IRA, and the account owner has passed away
    4. You’re withdrawing up to $10,000 for the purchase of a first home.

Assuming none of these is true for your child, any withdrawals of Roth IRA earnings will be subject to income taxes, as well as a 10% early withdrawal penalty.9

The role of the custodian

A custodial Roth IRA is unique in that the person who will benefit from the account isn’t the person who owns it. Because you must be at least 18 years old to open an investment account, a child requires an adult to open one on their behalf. In this case, that adult is known as the custodian.

As long as you’re the custodian of your child’s custodial Roth IRA, you’re tasked with managing the account and directing the investments in the best interests of the child. But just because you manage the account doesn’t mean you have access to those funds. The money in your child’s custodial Roth IRA belongs to them.

Transition to full ownership

Once your child reaches the age of majority in your state, they’ll take control of their own Roth IRA. The good news is your child can then learn to manage their own investments and can access the money in a responsible way to pay for financial goals and expenses.

The bad news, of course, is that your child has total access to the money, and there’s no requirement that they use the money responsibly. You can prepare your child for the responsibility of controlling a large sum of money by instilling financial education early and often.

Setting up a custodial Roth IRA

Setting up a custodial Roth IRA is a relatively easy process. Here’s a step-by-step guide:

  1. Make sure your child has income: Your child must have earned income for you to contribute to a Roth IRA on their behalf. Make sure your child reaches this requirement before you open an account and start contributing.
  2. Choose an investment firm: There are many firms that offer custodial Roth IRAs. Research your options to find the best fit. It may be easiest to use the same  firm that holds your own investment accounts.
  3. Open your account: To open your child’s custodial Roth IRA, you’ll have to provide information about both your child and the custodian, including Social Security numbers, names and contact information, birthdates, and more.
  4. Fund the account: Once the account is open, you can start making contributions. You can set up automatic contributions to ensure consistency or wait until the end of the year so you know the maximum you can contribute based on your child’s income.
  5. Maintain detailed records: Make sure to maintain detailed records throughout the year, especially if your child doesn’t file their own tax returns. You’ll want detailed records of their earned income, as well as documentation related to the account.

Maximizing the benefits

As a custodian, there are plenty of things you can do to maximize the benefits of a custodial Roth IRA to set your child up financially for the future.

Make regular contributions

Consistency is key when it comes to long-term investing. If you’re contributing to your child’s custodial Roth IRA, consider setting up recurring automatic contributions to ensure they happen each month. You can also encourage your child to make regular contributions from their own income.

Just remember that contributions to the account can’t exceed your child’s earned income for the year. Reassess income and contributions regularly to ensure you aren’t over-contributing.

Selecting investments

As the custodian, it’s your responsibility to choose investments within the custodial Roth IRA. Aim for a well-diversified portfolio that has opportunities for both growth and risk management. The goal is long-term growth, not quick wins.

Additionally, consider involving your child in some of the investment selection. Though mutual funds and exchange-traded funds can be one way to build a diversified portfolio, you may purchase a few individual stocks for companies that interest or excite your child to help get them interested in investing.

As your child gets older, you can open the line of communication even more about what investments are in their Roth IRA and why.

Tax implications and reporting

Because Roth IRA contributions aren’t tax-deductible, there are no upfront benefits, nor are there any reporting requirements. However, your child may be subject to income taxes and penalty taxes if any earnings are withdrawn without certain requirements being met.

Transitioning account ownership to the child

When your child reaches the age of majority in your state — usually that’s 18 — ownership of the custodial Roth IRA will transition to your child. You can prepare for this transition ahead of time by involving your child in the management of the Roth IRA before that time. That way, you can feel confident they’ll be able to manage the account responsibly.

Depending on your investment firm, your child may also need to open a new Roth IRA and transfer the assets into that account rather than continue to maintain the custodial account.

Monitoring the account

Once you’ve contributed to the custodial Roth IRA and chosen the investments, your work isn’t quite done. You should continue monitoring the account to ensure the investment strategy is still best suited for your financial goals for your child.

The bottom line

A custodial Roth IRA can help you save for your child’s future starting from the time they earn their own money. Roth IRAs can have tax advantages, including both tax-free growth and tax-free withdrawals, as well as the ability to access contributions at any time.

Just as importantly as setting your children up for success, a custodial Roth IRA can be an opportunity to instill financial literacy that will benefit them their entire lives.


*FOR ILLUSTRATIVE PURPOSES ONLY. This hypothetical illustration does not reflect a particular investment and is not a guarantee of future results. It assumes a 10% annual rate of return, reinvestment of earnings, and no withdrawals. Rates of return may vary. The illustration does not reflect fees, which could change the outcomes provided.


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  1. IRS. “Roth IRAs.” August 2023.
  2. IRS. “Frequently Asked Questions on Gift Taxes.” November 2023.
  3. IRS. “Estate Tax.” November 2023.
  4. IRS. “Publication 590-B (2022), Distributions from Individual Retirement Arrangements (IRAs).” April 2023.
  5. IRS. “Retirement Topics - Exceptions to Tax on Early Distributions.” December 2023.
  6. IRS. “401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000.” November 2023.
  7. IRS. “401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000.” November 2023.
  8. IRS. “Topic No. 451, Individual Retirement Arrangements (IRAs).” October 2023.
  9. IRS. “Publication 590-B (2022), Distributions from Individual Retirement Arrangements (IRAs).” April 2023.

The Currency editors

Staff contributors

The CurrencyTM, a publication from Empower, covers the latest financial news and views shaping how we live, work, and play. We keep you current on ways to plan, save, and invest for life.

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