You’re sitting there thinking about the future, maybe watching your kid struggle to tie their shoes or finally land their first summer job at the local pool. Then it hits you. Can I open an IRA for my child? The short answer is a resounding yes, but the "how" is where things get a little sticky. It isn't just about having the money; it’s about the IRS rules that govern exactly whose money it is and how it got there in the first place.
Most people assume IRAs are for adults with 401(k)s and graying hair. That's a mistake. Starting a Roth IRA for a minor is arguably the most powerful wealth-building move a parent can make. Why? Time. If you drop $1,000 into an account for a ten-year-old, that money has over five decades to bake in the market before they even think about retirement. We're talking about the magic of compounding on steroids.
But let's be real. You can't just open an account because you have a generous heart and a spare checkbook. The IRS is very particular about one specific thing: earned income.
The Earned Income Hurdle
Here is the deal. To contribute to an IRA—any IRA—the person whose name is on the account must have earned income. Your toddler isn't eligible just because they get an allowance for picking up toys. That's a gift, not a job.
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Earned income means taxable wages or self-employment net earnings. If your teenager is bagging groceries at Publix or lifeguarding, they’re golden. They have a W-2. They’re "in the system." But what about younger kids? This is where it gets interesting. If you own a business, you can hire your child. They can model for your website, help with filing, or clean the office. You have to pay them a "reasonable" wage—meaning you can’t pay a seven-year-old $100 an hour to shred paper. If you pay them $15 an hour and keep meticulous records, that counts as earned income.
Even "informal" jobs like babysitting, lawn mowing, or pet sitting count, provided you keep a log of who paid what and when. The IRS doesn't necessarily require a W-2 for these neighborhood gigs, but they do require the income to be reported.
The Custodial Workaround
Since minors can’t legally enter into binding contracts in most states, they can’t just hop onto Vanguard or Charles Schwab and open an account themselves. You have to open what's called a Custodial IRA (often referred to as a Roth IRA for Minors).
As the custodian, you control the assets. You pick the index funds, you manage the trades, and you make sure the contributions don't exceed their earnings. However, the money legally belongs to the child. Once they hit the age of majority—usually 18 or 21 depending on your state—the account converts to a standard Roth IRA in their name. You lose control. They get the keys to the castle. You just have to hope you taught them enough about finance that they don't blow it on a used Corvette the week they turn 21.
Why a Roth IRA is Usually the Better Move
When asking can I open an IRA for my child, you usually have two choices: Traditional or Roth. Honestly? The Roth wins almost every single time for a kid.
In a Traditional IRA, you get a tax deduction now, but you pay taxes when you take the money out later. Kids usually don't make enough money to owe federal income tax anyway. A tax deduction is worthless to them. With a Roth IRA, you put in "after-tax" money. Since the kid is likely in the 0% or 10% tax bracket, they aren't paying much tax on the way in.
The kicker? All that growth is tax-free.
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Think about that. If they put in $6,000 at age 15 and it grows at an average of 8% annually, that single contribution could be worth over $250,000 by the time they hit 70. And they won't owe the IRS a single penny on that quarter-million. It’s a total loophole for generational wealth that most families simply ignore.
Limits and the Fine Print
You can't just dump $50,000 into a kid's IRA. For 2024 and 2025, the contribution limit is $7,000 (or the total of their earned income, whichever is less).
- If your daughter earns $3,000 coaching soccer, the most she can put in is $3,000.
- If she earns $10,000, she’s capped at $7,000.
One clever trick? You can "match" their earnings. If your son earns $2,000 working at a pizza shop and wants to spend it on a new gaming PC, you can let him spend his paycheck and you can put $2,000 of your own money into his Roth IRA. As long as the total going into the account doesn't exceed what he actually earned, the IRS is happy. It’s a great way to reward work ethic without forcing a teenager to sacrifice their entire social budget.
Flexibility Beyond Retirement
One of the biggest misconceptions about the Roth IRA for minors is that the money is "locked away" until they are 60. That's not entirely true.
Roth IRA contributions (the actual money put in, not the growth) can be withdrawn at any time, for any reason, penalty-free. While you generally shouldn't do this because you'd be killing the compounding machine, it offers a safety net.
Furthermore, there are exceptions for "qualified distributions" before retirement age.
- First-time home purchase: They can take out up to $10,000 of earnings to buy a home.
- Education expenses: They can withdraw funds for college, though they might owe taxes on the earnings portion (but no 10% penalty).
It’s basically a multi-tool for their financial life.
Real World Example: The "Baby Model" Strategy
Let’s look at a real-world scenario. A photographer friend of mine used her daughter in several commercial shoots for her portfolio and local advertisements. She paid the daughter a fair market rate of $500 per shoot. Over the course of a year, the daughter "earned" $3,000.
The mom opened a Custodial Roth IRA and deposited that $3,000. She did this every year from age 5 to age 18. By the time the daughter went to college, she had $39,000 in contributions alone, which had grown to nearly $70,000 in a total stock market index fund.
The daughter didn't touch it. She let it sit. By the time she reaches 60, without ever adding another dime, that account will likely be worth over $1.5 million. All because of some photos taken when she was in kindergarten.
Setting Up the Account: Step-by-Step
Getting this started isn't as hard as doing your own taxes. Most major brokerages like Fidelity, Charles Schwab, and Vanguard offer these accounts with no opening fees.
- Verify Income: Make sure your child actually has "earned income" and document it. Keep those W-2s or a simple spreadsheet for "odd jobs."
- Choose a Brokerage: Look for one that offers "Custodial Roth IRAs." Fidelity is a popular choice because they have no minimums and a great "Fidelity Youth" app.
- Provide Info: You'll need the child's Social Security number and birthdate.
- Fund and Invest: Don't just leave the cash in the account! This is a common pitfall. You have to actually buy something—usually a low-cost S&P 500 index fund or a Total Stock Market fund.
Common Pitfalls to Avoid
Don't get cute with the IRS. If you pay your kid $7,000 to "consult" on your Minecraft strategy, you're asking for an audit. The work must be legitimate, and the pay must be standard for the industry.
Also, keep an eye on the Kiddie Tax. While this usually applies to unearned income (like dividends or interest in a standard brokerage account), it’s a reminder that the IRS keeps a close watch on how parents shift money to their children to avoid higher tax brackets.
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Lastly, remember that an IRA can impact financial aid. Money in a child's name (like a standard savings account or a UGMA/UTMA) is weighed heavily in the FAFSA formula. However, retirement assets—including a Roth IRA—are currently excluded from the FAFSA calculation. This makes the Roth IRA a stealthy way to save for the future without tanking their chances of getting college grants.
Actionable Next Steps
If you’re ready to pull the trigger, don’t overthink it.
- Audit last year's earnings: Did your kid have a summer job or a paper route? If they earned money in the previous calendar year, you often have until the April tax deadline to contribute for that year.
- Open the account today: It takes about ten minutes online. You don't need a huge lump sum; even $50 gets the ball rolling.
- Automate the investment: Set the account to automatically buy a broad-market ETF or mutual fund every month.
- Keep the "Paper Trail": Create a folder (digital or physical) specifically for your child's income documentation. If they were paid in cash for mowing lawns, write down the date, the customer’s name, and the amount.
Starting an IRA for your child is less about the money and more about the timeline. You are giving them the one thing you can't buy more of: years in the market.