A custodial Roth IRA for minors is a retirement account an adult opens and manages on behalf of a child who has earned income, with the child as the legal owner. For 2026, the contribution limit is $7,500 or the child’s total earned income for the year, whichever is less.1Internal Revenue Service. Retirement Topics – IRA Contribution Limits The adult custodian handles investment decisions until the child reaches the age of majority under state law, and then the account converts to a standard Roth IRA in the young adult’s name. Every dollar in the account belongs to the child from day one.
What Counts as Earned Income
The child must have earned income before any contribution is legal. Earned income means pay for actual work: wages, salaries, tips, bonuses, commissions, and net self-employment earnings.2Internal Revenue Service. Publication 590-A – Contributions to Individual Retirement Arrangements Allowances, birthday money, savings interest, and dividends do not count. Age is irrelevant. A seven-year-old paid $500 for a modeling job has $500 of eligible compensation just as a sixteen-year-old lifeguard does.
Self-employment income needs extra care. A teenager mowing lawns or running a small craft business is self-employed. Once net self-employment earnings reach $400, the child owes self-employment tax and must file a return, even if their income tax bill is zero.3Internal Revenue Service. Self-Employment Tax – Social Security and Medicare Taxes That catches families by surprise.
Documenting Informal Work
A W-2 job proves itself. Informal work does not. If your child babysits, tutors, or does yard work for neighbors, keep a written log for each job: date, client name, work performed, hours, and amount paid. Save Venmo confirmations, receipts, and any texts arranging the work. The IRS can ask the custodian to show that contributions did not exceed real earnings, and the pay has to be reasonable for the work. Paying your own child $50 an hour to take out the trash is not going to hold up.
Who Can Actually Fund the Account
Here is the detail that makes these accounts practical: the money going into the Roth IRA does not have to come from the child’s own pocket. A parent, grandparent, or anyone else can deposit cash on the child’s behalf, as long as the child earned at least that amount for the year. The IRS caps contributions at the child’s taxable compensation or $7,500, whichever is smaller.1Internal Revenue Service. Retirement Topics – IRA Contribution Limits Whose bank account the money leaves is not tracked.
So a teenager who earned $3,000 babysitting can spend those wages on whatever they want while a grandparent puts $3,000 into the Roth IRA. Many families run this as a match: the child earns, the adult funds. Contributions from all sources combined still cannot exceed the earnings figure or the annual limit.
2026 Contribution Limits and Deadline
The 2026 annual limit is $7,500.4Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Most minors will not come close. The lesser-of rule caps the contribution at what the child actually earned. A summer job that paid $2,200 supports a $2,200 contribution, not $7,500.
Contributions for tax year 2026 can be made from January 1, 2026 through April 15, 2027. A filing extension does not extend the contribution deadline. Roth IRA income phase-outs technically exist, starting at $153,000 for single filers and $242,000 for joint filers in 2026, but they almost never affect a child.4Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
Opening the Account
Not every brokerage offers custodial Roth IRAs. Some offer only standard UGMA or UTMA custodial brokerage accounts, which are a different product. Before applying, confirm the firm specifically lists a custodial Roth IRA or a “Roth IRA for Kids.”
The application collects Social Security numbers, dates of birth, and a residential address for both the adult and the child, plus a government-issued ID for the custodian. The adult is named as custodian; the child is named as owner. Getting the naming right from the start matters, because the child legally owns the assets regardless of who is managing them.
Once the application clears, the custodian links a bank account, waits for the brokerage’s test-deposit verification, and transfers the first contribution. Activation usually takes a few business days.
How the Tax Benefit Works
Contributions go in with after-tax dollars, so there is no deduction. In exchange, investment growth is never taxed as long as the eventual withdrawal is qualified. That trade is unusually favorable for a minor, because a child typically owes little or no income tax anyway, and the money can grow for fifty or sixty years before it comes out.
A qualified distribution requires two things: the account has been open for at least five tax years, and the owner is at least 59½ or meets a specific exception such as disability or a first-time home purchase up to $10,000. When both are met, the entire withdrawal, contributions and earnings, is tax-free.
Getting to the Money Before 59½
Original contributions can be withdrawn at any time, at any age, with no tax and no penalty. The IRS treats contributions as coming out first, converted amounts next, and earnings last. That ordering is why a young adult can pull back everything they or their family put in without owing anything.
Earnings are where things tighten. Taking out gains before 59½ generally triggers income tax plus a 10% penalty. Several exceptions eliminate the penalty:
- Qualified higher education expenses at an eligible institution.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- A first-time home purchase, up to a $10,000 lifetime cap.
- Birth or adoption, up to $5,000 per event.
- Total and permanent disability as defined by the IRS.
Even when an exception removes the penalty, income tax on earnings can still apply if the five-year rule has not been satisfied. The penalty and the tax are separate questions.
The Five-Year Rule
The five-year clock starts on January 1 of the tax year the first contribution is made to any Roth IRA in the child’s name. Opening the account in November 2026 with a first contribution starts the clock on January 1, 2026, and the requirement is met on January 1, 2031. When the custodial account converts to the child’s own Roth IRA at majority, the original start date carries over.
Open the account as soon as the child has any earned income, even if the first contribution is $50. A child whose account was opened at 14 will clear the five-year rule by 19, in time for education or first-home withdrawals to line up cleanly.
Fixing an Excess Contribution
If contributions exceed the child’s actual earnings for the year, or exceed $7,500, the IRS charges a 6% excise tax on the excess for every year it stays in the account.1Internal Revenue Service. Retirement Topics – IRA Contribution Limits This is the most common mistake. A parent estimates the child earned $4,000 over the summer, contributes $4,000, and then finds the real net figure was $3,600. That $400 starts racking up the penalty.
To correct it, contact the brokerage and request a “return of excess contribution.” The excess plus any earnings attributable to it must come out before the tax filing deadline, including extensions, for the year of the contribution.6Internal Revenue Service. IRA Year-End Reminders Miss that deadline, and the 6% penalty applies each year until the excess is removed.
Effect on College Financial Aid
A custodial Roth IRA is one of the more aid-friendly ways to save for a child. The account balance is not reported as an asset on the FAFSA, because retirement accounts are excluded from the asset calculation.7Federal Student Aid. Filling Out the FAFSA Form A regular UGMA or UTMA custodial account works differently, with the full balance counting as the student’s asset and reducing aid.
Distributions are the catch. Money the child withdraws can appear as income on a later FAFSA, which uses prior-prior year data. The 2026-2027 form pulls from 2024 tax information.7Federal Student Aid. Filling Out the FAFSA Form Avoiding withdrawals during years that will feed a future FAFSA, or limiting withdrawals to original contributions, keeps the aid impact minimal.
Custodian Duties and What Happens at Majority
The custodian picks the investments, decides when to rebalance, and adjusts the allocation over time. Broad index funds and target-date funds are common, though the full menu at the brokerage is usually available. The child cannot direct trades or take distributions on their own until the account transfers.
That authority comes with a fiduciary duty to manage the account in the child’s best interest. Every dollar spent from the account must benefit the child. Using the money for a parent’s own expenses is a breach. Keep records of any withdrawal and its purpose; if you tap the account to cover the child’s orthodontia or a summer program, document it in writing.
When the child reaches the age of majority, typically 18 or 21 depending on state law and brokerage policy, the custodial arrangement ends. The brokerage sends paperwork to remove the custodian and convert the account into a standard Roth IRA in the young adult’s name. The five-year clock and full contribution history carry over. No taxes or penalties are triggered, because ownership is not changing; the child always owned the assets.
One reality to plan for: once the account is theirs, the young adult can do anything with it, including liquidating it. Nothing prevents a newly-turned-18-year-old from cashing out a Roth IRA their grandparent spent years funding. Families who care about the long-term outcome tend to start conversations about it well before the handoff date.