Custodial Roth IRA for Kids: The Complete Parent Guide

Your 14-year-old made $900 babysitting this year, and it's mostly sitting in a shoebox. Here's a thought that sounds too good to be true but isn't: that babysitting money can go into a retirement account where it may never be taxed again. That's the custodial Roth IRA — arguably the single most powerful account a working kid can have, and one most parents have never been told about.

This guide walks through exactly how it works for 2026, in plain English. (Quick note before we start: this is education, not personalized tax advice — for your family's specific situation, talk to a tax professional.)

What a custodial Roth IRA actually is

A custodial Roth IRA is a regular Roth IRA that belongs to your child, with you (the custodian) managing it until they reach adulthood. Money goes in after tax, grows tax-free, and qualified withdrawals in retirement are completely tax-free.

For a kid, the "after-tax" part is nearly a technicality. A child's earned income below the 2026 single standard deduction of $16,100 typically owes no federal income tax at all (per Rev. Proc. 2025-32). So in many cases the money goes in untaxed, grows untaxed, and comes out untaxed. Decades of compounding with potentially zero tax at every step — that's why financial folks get excited about this account.

If you're comparing this against other kid accounts, our guide to UGMA vs UTMA vs 529 covers the alternatives, and the investing for kids hub has the full picture.

The one big rule: earned income

Here's the catch that filters out most families: your child needs earned income. The 2026 contribution ceiling is the lesser of $7,500 or the child's taxable compensation for the year, per the IRS contribution rules.

If your daughter earned $1,850 walking dogs this year, her Roth limit is $1,850 — not $7,500. If your son earned $9,000 lifeguarding, his limit is the full $7,500.

What counts as earned income

• W-2 wages from any employer — the grocery store, the ice cream shop, summer camp
• Net self-employment earnings: babysitting, lawn mowing, pet sitting, snow shoveling, lifeguarding
• Acting or modeling income
• Wages from your family business (more on this below)

What does NOT count

• Allowance — even if it's tied to chores around your own house
• Birthday and holiday cash from grandma
• Interest, dividends, or investment gains

A helpful gut check: was it real work, done for someone, at a reasonable market rate? Paying your 8-year-old $500 to "smile at dinner" won't fly. Paying your 16-year-old $15/hour to genuinely manage your business's social media can.

A nice bonus: the money doesn't have to be their money

The IRS cares that the child earned at least as much as goes in — not whose wallet the contribution comes from. So if your son earned $2,000 mowing lawns and spent every penny on a gaming PC, you (or grandparents) can still contribute up to $2,000 of your own money to his Roth. Many families use this as a match: "for every dollar you earn, we'll put a dollar in your Roth."

Keep records like it matters (because it does)

For W-2 jobs, documentation is easy — the W-2 is your proof. For self-employment gigs like babysitting, there's no W-2, so keep a simple contemporaneous log:

• Date of each job
• Who paid (name of the neighbor or family)
• What the work was
• Amount received

A notes app or a one-page spreadsheet is plenty. You'll likely never need to show it to anyone, but if the IRS ever asks how a 13-year-old had $1,400 of earned income, that log is your answer.

The $400 self-employment threshold

If your child's net self-employment earnings reach $400 or more in a year, they must file a tax return and pay self-employment tax (Social Security and Medicare) via Schedule SE. That tax runs roughly 15.3% of net earnings, so a kid who nets $1,000 babysitting owes around $150. Not a dealbreaker, just a real cost to plan for — and a great first tax lesson.

The family-business superpower: no FICA for kids under 18

If you own a sole proprietorship, or a partnership where both partners are the child's parents, wages you pay your own child under 18 are exempt from Social Security and Medicare taxes under the IRS "family help" rules.

That means you can pay your 15-year-old real wages for real work — filing, photography for the website, packing orders — deduct it as a business expense, and the kid keeps every dollar with no FICA taken out. Those wages are earned income, so they unlock Roth contributions too.

Two non-negotiables: the work must be genuine, and the pay must be reasonable for the job. Document hours and duties just like you would for any employee.

Where to open one (all free, none of these are affiliate links)

Three major brokerages offer custodial Roth IRAs with no minimums and no account fees:

• Fidelity — Roth IRA for Kids, opens fully online
• Schwab — custodial Roth IRA, $0 minimum
• Vanguard — custodial IRA, Roth or traditional

You open the account as custodian, your child is the owner, and you manage the investments until they come of age. Any of the three is a fine choice; pick the one where you already have accounts, and the whole setup takes an evening.

Withdrawal rules: friendlier than you'd think

The Roth's reputation for "locked until retirement" is only half true:

• Contributions (the money you put in) come out anytime, for any reason, tax- and penalty-free.
• Earnings come out tax-free after age 59½, provided the account has been open at least 5 years (the IRS "qualified distribution" rules).
• Exceptions: up to $10,000 of earnings for a first-home purchase can come out tax- and penalty-free (after the 5-year rule), and education expenses avoid the 10% early-withdrawal penalty on earnings (though not income tax on those earnings).

So if your child contributes $5,000 through high school and needs cash at 22, that $5,000 is reachable. Only the growth needs to stay put.

The handoff at adulthood

At your state's age of majority or custodial termination age — usually somewhere between 18 and 21 — the account transfers to your child's sole control. They can keep investing, or they can cash it out and buy a very questionable car. This is exactly why the account works best alongside actual money education; our age-by-age money milestones roadmap is built for that, and explaining compound interest in kid terms is the conversation that makes them want to leave it alone.

What $7,500 of teenage earnings could become

Here's the number that convinced us. Say your kid contributes $1,500 a year for five years, ages 14 through 18 — $7,500 total, well within a babysitting-and-lifeguarding budget — and then never adds another dollar.

At a 7% annual return (roughly the U.S. stock market's historical inflation-adjusted average — a historical figure, not a guarantee), that $7,500 grows to about $207,000 in today's dollars by age 65. One thousand dollars invested at 15 alone becomes roughly $29,000.

The magic ingredient isn't the amount. It's the 50-year runway. Run your own numbers with our compound interest calculator for kids — it's built to show your child their own timeline.

The bottom line

If your child has real earned income — any amount — a custodial Roth IRA is worth an evening of your time. Log the income, open the account at Fidelity, Schwab, or Vanguard, contribute up to what they earned (max $7,500 for 2026), and let five decades do the heavy lifting. Few things you set up in an hour will ever compound like this one.