Yes, you can open a 401(k) for your child, but only if the child has earned income from a real job, and in most families that means hiring the child through a business you own. A third-party employer’s plan is almost always closed to minors because federal law lets 401(k) plans require participants to be 21 and to have completed a year of service before they can enroll.1Office of the Law Revision Counsel. 26 U.S. Code 410 – Minimum Participation Standards For many families, a custodial Roth IRA turns out to be the simpler tool, so it’s worth understanding both paths before setting anything up.
The Earned Income Requirement Comes First
Every 401(k) contribution has to be tied to compensation from actual work. Contributions are capped at 100% of the participant’s compensation or the annual dollar limit, whichever is less.2Internal Revenue Service. Retirement Topics – Contributions So a child needs documented wages, tips, or self-employment income. Investment returns, interest, and gift money from relatives don’t qualify.
Paying a child an allowance for household chores usually doesn’t create qualifying income either. The wages have to come from an actual business entity, the work has to be real, the pay has to be reasonable, and the arrangement has to be documented the way you’d document hiring anyone else.
Why a Regular Employer’s Plan Rarely Works
Even when a teenager lands a part-time job at a company that offers a 401(k), plans are allowed to require participants to be at least 21 and to have completed a year of service, and most large employers set eligibility at or near those maximums.3U.S. Department of Labor. FAQs About Retirement Plans and ERISA A plan could admit younger participants, but few do.
Part-time employees also typically need to work at least 1,000 hours in a year, which is roughly 20 hours per week, before becoming eligible.3U.S. Department of Labor. FAQs About Retirement Plans and ERISA A minor working summers or a few school-year shifts rarely clears that. Between the age rule and the hours rule, the third-party employer route usually isn’t available.
Hiring Your Child Through a Family Business
The practical route is to hire your child through your own business. A sole proprietorship, a partnership owned by the child’s parents, or another family entity can employ the child and sponsor a retirement plan. The child does legitimate work: filing, data entry, social media, cleaning, or other age-appropriate tasks, and receives a paycheck like any employee.
Two rules can’t bend. The work must be real, with defined duties and documented hours. And the pay must be reasonable, meaning it matches what you’d pay an unrelated person for the same work. Paying a child $100 an hour to sort papers invites an audit and can jeopardize the plan’s tax status.
FICA Relief for Sole Proprietorships and Parent Partnerships
If a sole proprietorship or a partnership made up entirely of the child’s parents employs the child, wages paid to that child under age 18 are exempt from Social Security and Medicare taxes.4Office of the Law Revision Counsel. 26 USC 3121 – Definitions The exemption doesn’t apply when the employer is a corporation (including an S corporation) or a partnership that includes a non-parent partner.
Child Labor Rules Still Apply
Federal law generally sets 14 as the minimum age for employment, with limits on hours and job types for anyone under 16.5U.S. Department of Labor. Age Requirements Children working in non-hazardous jobs for a parent’s business are exempt from the minimum-age restrictions. Many states also require work permits or age certificates for minors, so check with your state labor department before putting your child on payroll.
Watch Out for the Solo 401(k) Problem
A one-participant 401(k), often called a Solo 401(k), is designed for a business owner with no employees other than a spouse.6Internal Revenue Service. One-Participant 401(k) Plans Once you add a child who works 1,000 hours or more in a year, the plan generally no longer qualifies as one-participant and may need to convert to a standard 401(k), with nondiscrimination testing and a possible Form 5500 filing. If your child works fewer hours, the plan document may let you exclude them and keep the solo structure. Read the eligibility rules in your plan document carefully before you hire.
Records That Hold Up to an Audit
The IRS looks at family employment more closely than arm’s-length hiring, so keep documentation strong:
- A written job description that names specific tasks, not “helping around the office.”
- Daily time records showing when the child worked and for how long.
- A signed employment agreement covering pay rate, schedule, and duties.
- Payment by check or direct deposit into an account in the child’s name, not cash.
- A Form W-2 at year-end, filed with the Social Security Administration like any other employee’s.7Internal Revenue Service. 401(k) Plan Overview
The test is simple. If every record would hold up assuming the employee was a stranger, you’re in good shape.
Choose Roth Over Traditional for a Low-Earning Child
If the plan offers both options, the Roth 401(k) is almost always the better pick for a child. Traditional contributions reduce taxable income now and are taxed in retirement, but a child earning a few thousand dollars likely owes little or no federal income tax already. The 2026 standard deduction for a single filer is $16,100, so wages below that generally carry no federal income tax at all.8Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A deduction against a zero tax rate saves nothing.
With a Roth 401(k), the child pays tax now (effectively zero for wages under the standard deduction) and later withdraws contributions and decades of growth tax-free, as long as the withdrawal meets the qualifying rules. For a teenager with 40 to 50 years of compounding ahead, that’s the whole point.
2026 Contribution Limits Are Capped by the Child’s Pay
The 2026 maximum employee elective deferral to a 401(k) is $24,500.9Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 But contributions can’t exceed 100% of the participant’s compensation.2Internal Revenue Service. Retirement Topics – Contributions For a child earning $6,000 in a year, the real cap is $6,000, not $24,500.
When you add employer contributions such as profit-sharing, the total of all contributions to the account can’t exceed the lesser of $72,000 or 100% of compensation for 2026.10Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs For a child with modest wages, the compensation cap is what actually binds. Check year-to-date pay before making contributions.
Fixing an Excess Contribution
If a contribution exceeds the child’s compensation or the deferral limit, the excess and any earnings on it must be distributed no later than April 15 of the following year.11Internal Revenue Service. Consequences to a Participant Who Makes Excess Deferrals to a 401(k) Plan Filing an extension on the child’s return doesn’t move that date.
A timely corrective distribution is included in gross income for the year of the deferral but isn’t taxed again when paid out. Miss the April 15 deadline and the excess is taxed twice: once in the deferral year and again when it leaves the plan.12Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust On a child’s small account balance, even a small excess can represent a big share of the total, so catch errors quickly.
Consider a Custodial Roth IRA Instead
Before setting up a 401(k), think about whether a custodial Roth IRA would do the job. Any child with earned income can contribute to a Roth IRA, no employer plan required. The 2026 limit is $7,500 or 100% of the child’s earned income, whichever is less.13Internal Revenue Service. Retirement Topics – IRA Contribution Limits
A parent or other adult opens and manages the account as custodian until the child reaches adulthood, typically 18 or 21 depending on the state. The child’s earned income can come from babysitting, lawn mowing, a part-time retail job, or any other genuine work. You don’t need a family business, a plan document, or W-2 payroll.
The tax treatment is the same idea as a Roth 401(k): after-tax in, qualified withdrawals out tax-free. For a child earning under $7,500 with no access to an employer plan, a Roth IRA reaches the same goal with far less paperwork. The 401(k) route through a family business is worth the added complexity mainly when the child earns significantly more and you want to shelter a larger amount.
What Setting Up the 401(k) Requires
If you decide the 401(k) path fits, plan on gathering the following:
- The child’s Social Security Number, which links their tax identity to the account.14Internal Revenue Service. Taxpayer Identification Numbers (TIN)
- An Employer Identification Number for the business, separate from your personal Social Security Number.14Internal Revenue Service. Taxpayer Identification Numbers (TIN)
- A plan document and adoption agreement setting out eligibility, contributions, and investment rules. Brokerages that offer small-business 401(k) plans usually provide pre-approved versions you can adopt.15Internal Revenue Service. Types of Pre-Approved Retirement Plans
On the application, the child is listed as the plan participant and the business owner (or a designated professional) serves as plan administrator. The child’s name on the paperwork has to match the Social Security card exactly, or the brokerage’s compliance team will send it back. Initial contributions are usually electronic transfers from the business bank account.