Can I Open an IRA for My Child? Earned Income, Limits, and Rules

Yes, you can open an IRA for your child as long as the child has earned income from real work during the year. The account is set up as a custodial IRA: your child is the owner, and you manage it as custodian until they reach the age of majority in your state. For the 2026 tax year, the annual contribution limit is $7,500 or the child’s total earned income, whichever is less.¹ Because most children owe little or no income tax, a Roth version of the account is almost always the better choice, locking in decades of tax-free growth.

Your Child Needs Earned Income

The IRS requires anyone contributing to an IRA to have earned income, meaning money received as payment for work actually performed during the tax year.² For a child, that usually looks like one of two things:

Wages reported on a W-2 from a part-time job at a store, restaurant, or similar employer.
Self-employment income from work like babysitting, tutoring, pet-sitting, or yard work.

What doesn’t count is unearned income: interest, dividends, capital gains, allowances, and gift money from relatives. None of that can be used to justify an IRA contribution.²

If your child works for your family business, the duties need to be real and the pay reasonable for the work, comparable to what you’d pay someone outside the family. Keep records of the hours, tasks, and payments. A self-employed child with $400 or more in net earnings must file a tax return and pay self-employment tax.³

Roth or Traditional

Both types of IRA are available in custodial form. The tax treatment differs, and for children the math almost always points one way.

Traditional IRA

Contributions may be deductible in the year they’re made, and the balance grows tax-deferred; withdrawals in retirement are taxed as ordinary income.⁴ For a child earning a few thousand dollars, the deduction is worth little or nothing because their income already falls below the standard deduction. In exchange, every dollar taken out in retirement gets taxed.

Roth IRA

Contributions go in with after-tax dollars, and qualified withdrawals in retirement, including all the growth, come out tax-free.⁵ For a child who pays little or no tax now, that’s an excellent trade: give up a deduction that wasn’t worth much, and get 50-plus years of tax-free compounding.

The Roth is also more flexible before retirement. Contributions (not earnings) can be withdrawn at any time, at any age, tax- and penalty-free, because the IRS treats Roth distributions as coming from contributions first.⁶ That combination is why the great majority of custodial IRAs opened for minors are Roth accounts.

How Much You Can Put In

The annual contribution is capped at the lesser of the child’s earned income or the statutory dollar limit, which is $7,500 for 2026.¹ If your child earns $2,000 mowing lawns over the summer, $2,000 is the ceiling. If they earn $10,000 at a part-time job, the ceiling is $7,500.

The money going into the account does not have to come from the child’s own pocket. A parent, grandparent, or anyone else can fund the contribution as long as the child actually earned at least that much for the year.¹ This is what makes the account practical for families: the child keeps their paycheck, and a relative deposits the matching amount into the IRA.

Contributions for a tax year can be made any time from January 1 of that year through the federal filing deadline the following April. A 2026 contribution can be made as late as April 15, 2027.

If you contribute more than allowed, the excess is subject to a 6 percent excise tax for every year it stays in the account.¹ To avoid it, withdraw the excess (plus any earnings on it) before the tax filing deadline for that year.⁷

How to Open the Account

Most major brokerage firms offer custodial IRAs, and the application can be completed online. You’ll need:

For the child: full legal name, date of birth, and Social Security number.
For you as custodian: Social Security number, government-issued photo ID, physical address, and contact information.

You complete the application as the responsible adult managing the account, with the child listed as the account owner. During setup you’ll choose Roth or traditional. Once the account is approved, you link an outside bank account and initiate a transfer; electronic transfers typically settle in one to three business days, and the account is then ready to invest.

Inside the account, a custodial IRA can hold the same investments as any adult IRA: index funds, individual stocks, bonds, ETFs, and mutual funds. A simple, diversified index fund is a common starting point because it spreads risk and needs little ongoing attention.

Getting Money Out Before Retirement

A custodial IRA is a retirement account, so early withdrawals generally carry consequences. The rules differ sharply between the two account types.

With a Roth, your child can withdraw an amount up to their total contributions at any time, for any reason, with no income tax and no 10 percent early withdrawal penalty. Only when withdrawals exceed contributions and start pulling from earnings do taxes or penalties come into play.⁶

If earnings do get withdrawn before age 59½, the 10 percent penalty may be waived in specific situations. Two matter most for young account holders:

Qualified higher education expenses, such as tuition, fees, books, supplies, and room and board.⁸
A first-time home purchase, up to $10,000 in earnings.⁸

Even when the penalty is waived, withdrawn Roth earnings are still subject to income tax unless the distribution is “qualified,” meaning the account has been open for at least five tax years and the owner meets an additional condition such as reaching age 59½.⁵

Effect on Financial Aid

A custodial IRA has a notable advantage over a regular custodial brokerage account when it’s time to apply for college aid. Retirement accounts, including IRAs, are not counted as assets on the FAFSA. Assets held in UGMA or UTMA custodial brokerage accounts, by contrast, are reported as the student’s assets and can reduce aid eligibility.⁹

One caveat: if your child takes a distribution from the IRA to pay for college, that money can count as income on the following year’s FAFSA and may affect aid eligibility for the next academic year.

When Your Child Takes Over

You manage the account only until the child reaches the age of majority. That’s 18 in most states, 19 or 21 in a few, and some brokerages allow the transfer to be delayed as late as age 25 depending on state law. At the handoff, the account converts to a standard IRA in your child’s name, and they control contributions, withdrawals, and investment decisions from that point on.

Because your child eventually becomes the sole decision-maker, it helps to bring them into the account early. Show them statements, walk through how the investments work, and explain why the money is there. A teenager who understands what a retirement account is for is less likely to empty it the moment they can.

1
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
2
Internal Revenue Service. Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs)
3
Internal Revenue Service. When the Lemonade Stand Makes Bank: Young Entrepreneurs and Taxes
4
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
5
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
6
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
7
Internal Revenue Service. Instructions for Form 5329 (2025) Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
8
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
9
Federal Student Aid. Current Net Worth of Investments, Including Real Estate