Can I Start a 401(k) for My Child? Roth IRA Options and Limits

You can start a 401(k) for your child in theory, but almost no family can actually pull it off, and the ones who can usually shouldn’t bother. A 401(k) requires an employer that sponsors a plan, plan documents that don’t exclude workers under 21, and a child with real earned income to contribute. For nearly everyone asking the question, a custodial Roth IRA is the right tool — same tax-free growth, none of the plan overhead, and your child can open one the moment they earn their first paycheck.

What Your Child Needs Before Any Retirement Account Is Possible

No earned income, no retirement account. This is the starting point for a 401(k) or an IRA. Under federal tax law, a 401(k) is a plan for the benefit of employees who receive compensation for services.1Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans Your child needs actual wages for actual work. Allowance money, birthday cash, and investment dividends don’t count.

The pay also has to be reasonable for the type of work and the child’s age. Paying a 10-year-old $50 an hour to shred documents invites trouble. Compensation should reflect what you’d pay any outside worker for the same task. The IRS can disallow a deduction for the portion of wages it considers excessive, and may impose accuracy-related penalties under Section 6662 when compensation falls far outside a reasonable range.2Internal Revenue Service. Reasonable Compensation Job Aid for IRS Valuation Professionals

Whatever the child earns is also the ceiling on contributions. Total retirement contributions for the year can never exceed total earned compensation. If your daughter earns $3,000 over the summer, $3,000 is the most that can go into any retirement account for her that year.

Why a 401(k) Usually Isn’t an Option for a Minor

Here’s where most parents get stuck. Federal rules allow a 401(k) plan to require participants to be at least 21 years old and to have completed one year of service before they’re eligible to contribute.3Internal Revenue Service. 401(k) Plan Qualification Requirements Most plans include that age-21 threshold in their documents by default, which automatically excludes a 15-year-old employee no matter how many hours they work.

The Solo 401(k) creates its own catch-22. A Solo 401(k), sometimes called an Individual 401(k), is designed for self-employed business owners with no employees other than a spouse. You can hire your child under 21 without disqualifying the plan, but only because the child is excluded from participating. The child can work for your business and earn wages, but those wages can’t go into your Solo 401(k).

To actually let your child contribute, you’d need a standard employer-sponsored 401(k) with plan documents that either eliminate the age-21 requirement or set a lower minimum age. That means full plan administration: recordkeeping, annual compliance testing, nondiscrimination testing, and Form 5500 filings. For a small business, those costs typically run several thousand dollars per year. Hard to justify when your child might contribute a few thousand dollars annually.

The One Scenario Where a 401(k) Works

Some family businesses already run a standard 401(k) for multiple employees. If that’s you, adding your child is more practical. The plan documents need to either drop the age-21 eligibility requirement or set a lower threshold, and the child must meet whatever minimum service requirement the plan specifies.3Internal Revenue Service. 401(k) Plan Qualification Requirements

The child has to be a genuine employee performing real tasks that benefit the business: filing, cleaning, data entry, social media, inventory counts, or similar age-appropriate work. They follow the same hiring process as any other worker, with a completed W-4, recorded hours, and regular payroll. The business can also make employer matching or profit-sharing contributions up to 25% of the child’s compensation, though the match must be offered on terms consistent with what other employees receive to satisfy nondiscrimination rules.

The Custodial Roth IRA: What Most Families Actually Use

A custodial Roth IRA is the tool most families end up with, and for good reason. Any child with earned income can have one. No employer plan required, no plan documents, no compliance testing. A parent or guardian opens the account, manages the investments, and the child takes full control when they reach the age of majority in their state (typically 18 or 21).

The earned income can come from any legitimate source: wages from an outside employer, pay from a parent’s business, or self-employment income from mowing lawns or freelance work. As long as the income is reported to the IRS, it counts.

The money doesn’t have to come from the child’s own paycheck. If your teenager earns $4,000 from a summer job and spends every dollar of it, you can still contribute $4,000 of your own money to their Roth IRA. The IRS only requires that the child had at least that much in earned income, not that the specific dollars came from the child’s bank account.

Why Roth Almost Always Wins for a Child

Whether you’re looking at a Roth IRA or a designated Roth 401(k), Roth contributions are almost always the right choice for a young earner. Roth contributions go in after taxes are paid, and qualified withdrawals decades later come out completely tax-free, both the contributions and all the growth.4Internal Revenue Service. Retirement Topics – Designated Roth Account

The math is especially good for kids because most minors earn well below the standard deduction. For 2026, the standard deduction for a single filer is $16,100.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A child earning under that amount owes zero federal income tax, so Roth contributions cost nothing in taxes today, and decades of compound growth later come out tax-free. Traditional pre-tax contributions would save the child nothing now (they already owe no tax) but create a taxable withdrawal in retirement.

Income limits do exist on Roth IRAs, but they’re high enough that no working minor will come close. Neither a designated Roth 401(k) nor a pre-tax 401(k) has an income limit at all.6Internal Revenue Service. Roth Comparison Chart

2026 Contribution Limits

The IRS adjusts retirement contribution limits annually for inflation. For 2026:

For a child, the practical cap is almost always total earned income, not the plan’s dollar limit. A teenager earning $5,000 from a summer job can contribute at most $5,000, whether the account is a 401(k) or an IRA. The dollar ceilings only matter if the child earns more than those amounts, which is uncommon for minors.

Excess deferrals beyond the annual limit must be returned to the participant, along with any earnings on those amounts, by April 15 of the following year. Miss that deadline and the excess gets taxed twice: once in the year contributed and again in the year distributed.9Internal Revenue Service. 401(k) Plan Fix-It Guide – Elective Deferrals Werent Limited to the Amounts Under IRC Section 402(g)

If You Employ Your Child Through a Family Business

Families who employ their children through a business get a valuable payroll tax break. If a child under 18 works for a parent’s sole proprietorship, or for a partnership where both partners are the child’s parents, the wages are exempt from Social Security and Medicare taxes entirely.10Internal Revenue Service. Family Employees That’s a combined 15.3% savings.

The exemption disappears if the business is structured as a corporation, or if the partnership includes anyone other than the child’s parents. In those cases, normal Social Security and Medicare withholding applies at any age. Switching from a sole proprietorship to an LLC taxed as a corporation can eliminate the benefit overnight. For domestic work performed in a parent’s private home rather than a business, the FICA exemption extends until the child turns 21.

You also have to follow federal labor rules. Under the Fair Labor Standards Act, children of any age can work for a business entirely owned by their parents, with two exceptions: no one under 16 in mining or manufacturing, and no one under 18 in any occupation declared hazardous by the Secretary of Labor.11U.S. Department of Labor. Fact Sheet 43 – Child Labor Provisions of the Fair Labor Standards Act for Nonagricultural Occupations If your child works for someone else’s business, standard federal age minimums and hour restrictions apply, and state child labor laws may add further limits.

The paperwork matters. The business must issue a Form W-2 to the child for any year wages are paid.12Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3 Keep detailed records of dates, hours, tasks performed, and rate of pay. A written job description and regular timesheets are how you prove, if asked, that the wages weren’t a disguised gift. Pay market rates for age-appropriate work: a 14-year-old doing light filing at $12 an hour raises no eyebrows; the same child at $40 an hour invites questions.

Getting the Money Out Later

Money inside a 401(k) or traditional IRA is generally locked up until age 59½. Withdrawals before then are subject to ordinary income tax plus a 10% early distribution penalty.13Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions For a teenager, that’s roughly 45 years of restricted access. Worth understanding before the first contribution goes in.

Roth IRAs are more flexible, which is another reason they tend to fit young people better. Roth IRA contributions (not earnings) can be withdrawn at any time, at any age, without tax or penalty, because the money was already taxed on the way in. If your child needs the funds for college, a car, or an emergency at 22, they can pull out what they contributed without losing a dime. Earnings on Roth IRA contributions can also be withdrawn penalty-free for a first-time home purchase, up to $10,000.13Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions

Roth 401(k) accounts are less forgiving. Distributions from a designated Roth 401(k) account are only tax-free and penalty-free if at least five years have passed since the first Roth contribution and the participant has reached age 59½, become disabled, or died.4Internal Revenue Service. Retirement Topics – Designated Roth Account You can’t cherry-pick contributions the way you can with a Roth IRA. A distribution that doesn’t meet both conditions will include a taxable portion if earnings sit in the account.

For most families the answer looks the same at the end as it did at the start: open a custodial Roth IRA the summer your child earns their first real paycheck, contribute up to what they earned, and let 40 or 50 years of tax-free growth do the work.