What is a Custodial Roth IRA and How Does It Work?

A custodial IRA (short for individual retirement account) is an account that a custodian (typically a parent) opens and manages for the benefit of a minor. The barriers to entry are pretty low: These accounts generally have no minimum balance, or account-opening or maintenance fees. (Other account fees, fund expenses, and brokerage commissions may apply.)

As with any IRA, the owner of the account (the minor) must have earned income to make contributions to the account. The funds invested qualify for certain tax benefits, which will differ depending on whether you open a traditional IRA or a Roth IRA.

Types of custodial IRAs: Traditional vs. Roth

The difference between a traditional and Roth custodial IRAs is the same as between IRA accounts for adults:

• Traditional IRA: Contributions may be tax-deductible (subject to limits) and investments can grow tax-deferred. Withdrawals in retirement are generally taxed ordinary income. Generally, a traditional IRA makes sense for those who will be in a lower tax bracket in retirement.
• Roth IRA: Contributions are made with after-tax dollars, so there's no immediate tax break. Contributions and earnings can grow tax-free. When the owner reaches retirement age and meets other holding requirements, they can take advantage of tax-free withdrawals. Generally, a Roth IRA makes sense for those who will be in a higher tax bracket in retirement than they are today.

For many young workers, a Roth IRA may be especially appealing. Income from part-time or summer work is often low, and some teens may not owe federal income taxes at all.

The standard deduction for single filers is $16,100 in 2026. If a teen earns less than that amount, they may not owe federal income taxes—making the tax-free growth and tax-free withdrawals of a Roth IRA particularly attractive.

By contributing to a custodial Roth IRA during these low-income years, young savers may be able to lock in tax-free growth on money that was minimally taxed or not taxed at all.

To open a Roth IRA for a minor, you'll need their tax identification number, which is usually their Social Security number. (Keep your own information, including your Social Security number, handy just in case you need it.) Once the account is open, you'll need to manage the account as their custodian, which includes selecting investments once the account is funded. Then, when your child reaches the "age of termination," which is typically 18 or 21 (though, it's up to 25 in some states), your child takes over control of the account.

If the likelihood of a potentially smaller tax burden is one reason to consider a Roth IRA, then the sheer amount of time available to young investors willing to save for retirement is another. In fact, the earlier they start saving and investing, the less they'll likely have to set aside for retirement when they're older—thanks to the potential for compound growth.

The idea is that investments have the potential to generate income and appreciate in value over time. Those gains can be reinvested tax-free in an IRA, potentially leading to more income and growth, which can slowly accumulate year after year.

Here's an example of how starting early can give compounding more time to work:

• Sara takes on summer gigs including dog walking and babysitting and decides to contribute $2,300 of her earned income to a Roth IRA starting at age 15. If she keeps doing that until age 65 and earns an average annual return of 6%, she would contribute $115,000 over 50 years and accumulate more than $707,000.
• Chris doesn't start saving until age 30. Assuming the same 6% growth rate over the next 35 years (when he reaches age 65), Chris would have to set aside about $6,000 a year for a total of $210,000 of contributions to equal Sara's ending account value. In the end, Chris had to save $95,000 more to end up with the same amount.

Starting earlier may allow someone to contribute less overall and still end up with a similar balance by retirement.

Anyone can contribute to a child's custodial Roth IRA, including parents or guardians. However, total contributions from all sources combined can't exceed the child's earned income or the annual IRA contribution limit ($7,500 in 2026), whichever is lower.

For example, let's say Joey makes $3,000 as a lifeguard over the summer. The most that can be contributed to his Roth IRA is $3,000. He could fund the entire amount himself, or share the contribution with a parent—as long as the total doesn't exceed $3,000.

Qualified tax free withdrawals from a Roth IRA can be taken after age 59½. In addition, the Roth account needs to have been funded for five years before you withdraw any earnings—even after you've reached age 59½—or you could owe taxes. Plus, nonqualified withdrawals before that age could also trigger a 10% penalty.

That said, there are some exceptions to the early-withdrawal penalty in certain circumstances, such as qualifying education expenses or a first-time home purchase, though taxes may still apply to earnings.

Encouraging your young worker to start investing early can also be a way to boost their financial literacy and potentially lighten the need to save in the future. Watching the account over time and engaging in discussions about it can help your child remain excited about personal education and retirement planning. Kids who catch the "investing bug" at an early age may be more likely to continue contributing once they're managing their retirement nest eggs on their own.

Before taking action, we recommend talking with a wealth advisor to see if Roth contributions make sense for your child's future.