Custodial Roth IRA

Want your kid to get a head start on saving for retirement? A custodial Roth IRA might be a good option.

Written by Jess Ullrich / July 26, 2022

Quick Bites

  • Custodial Roth IRAs are retirement savings accounts that a custodian (typically a parent) establishes and maintains on their child’s behalf.
  • Building a retirement nest egg might not be on your teen’s radar by any means, but investing early is an excellent way to build wealth.
  • A custodial Roth IRA can also be a great way to introduce your teen to the concept of investing.

As a kid or teen, saving for retirement probably never even crossed your mind. (I know it sure didn’t cross mine.) But starting to build a nest egg early can be beneficial to anyone. Doing so gives you a really long time horizon before retirement, allowing your investments to grow for several decades. Basically, the earlier you start, the more money you could save, and the easier that piece of the retirement puzzle will be.

Clearly, a custodial Roth IRA can give your kid a financial advantage down the line. Here’s how this type of account works, how it’s different from a traditional IRA and what to know about the rules for opening one.

Inside this article

  1. Custodial Roth IRA
  2. Custodial Roth IRA vs. IRA
  3. Why it’s good for the kids
  4. Lay out the rules for me, please
  5. Opening a Custodial Roth IRA
  6. Are Roth IRAs insured?

How does a custodial Roth IRA work?

With a custodial Roth IRA, a parent (or a legal guardian) opens a retirement savings account on behalf of their kid. As an account custodian, you’ll be responsible for contributions, investments and other decisions. But the kid is the actual account owner, and the assets will be transferred to them once they reach a certain age—usually 18 or 21, depending on the rules in your state.

To be eligible for this account, your teen must have earned income. They don’t need to have a full-time job or be formally employed by a business—they can simply have income from mowing lawns or babysitting, for example. So if your entrepreneurial teen makes $1,500 helping neighbors with their landscaping, you can contribute up to that amount in their custodial Roth IRA.

Custodial Roth IRA vs. Custodial Traditional IRA

You have two options if you’re considering a custodial IRA for your child: Roth IRA and traditional IRA. With a Roth IRA, any contributions you make are post-tax and are not tax-deductible in the year you make them. But your child can also get the benefit of tax-free withdrawals in retirement. With a traditional IRA, contributions are pre-tax, so they’re tax-deductible in the current year, but subject to taxes on withdrawals in retirement.

In most cases, a custodial Roth IRA makes the most sense for a child. That’s because your teen is likely in a very low tax bracket and won’t necessarily benefit from the current-year tax deductions a traditional IRA provides. However, every situation is different, so it might make sense to talk with a tax professional before you open a new account.

Why it’s good for the kids

If you’re wondering why anyone might want to open a retirement account for a child, the answer is simple: compound interest. And also, big expenses. Let us explain.

For the compound interest piece, let’s go back to our $1,500 contribution example. Here’s what that small contribution would look like over the years, assuming a 7% annual return:

After 10 years$2,950.73
After 20 years$5,804.53
After 30 years$11,418.38
After 40 years$22,461.69

Those are some pretty amazing returns on a $1,500 investment. Now let’s look at how a $5,000 contribution to your teen’s custodial Roth IRA might grow over time. (Also assuming a 7% annual return here.)

After 10 years$9,835.76
After 20 years$19,348.42
After 30 years$38,061.28
After 40 years$74,872.29

Almost $75K for one initial investment early in life? Yes, please!

Not only can the funds in a custodial Roth IRA be used as a retirement nest egg, but they can also help cover qualifying expenses like college tuition or a first-time home purchase. Qualified distributions can be taken tax-free and penalty-free, which is good news if your child decides they need to use the funds in their account earlier than age 59 ½.[1]

There’s also an added benefit.

“Opening a custodial Roth IRA is a great opportunity to discuss finances with your child,” says Kevin L. Matthews II, a former financial advisor and founder of investing education company BuildingBread. “There is something to be said for the compounding wisdom of experience that your child can gain. A 10-year-old child starting with a custodial Roth IRA today would have 20 years of investing experience and compounding interest behind them at age 30.”

Lay out the rules for me, please

We’ve already mentioned your teen needs to have earned income to be eligible for a custodial Roth IRA, but there are a few other rules to be aware of. Here’s what to know:

Contribution limits

Unfortunately, even if your teen earns $100,000 annually as a TikTok influencer, you’ll still be subject to a contribution limit with a custodial Roth IRA. That limit is $6,000 (or $7,000 if you’re 50 and older, but that doesn’t apply to your teen) for 2022.[2]

Tax treatment

If you opt for a custodial Roth IRA, your contributions will be post-tax. While there are no immediate tax benefits, withdrawals in retirement won’t be taxed, so the future benefits are big.


When you open a retirement account later in life, you’re typically going to be investing for retirement alone. So you might not be looking to withdraw any funds before age 59 ½. While it would be awesome for your teen to just keep their Roth IRA as an investment vehicle, they can also use that money for qualified withdrawals without penalty.

For instance, if your teen needs money for eligible higher education expenses, it’s there. Or if they eventually want a down payment for their first home, it’s available. (Of course, this is assuming that withdrawals are qualified according to IRS rules.)

Ownership transfer

Once your child turns 18 (or 21, depending on the state in which you live), the assets and ownership of their custodial Roth IRA will need to be transferred to them. At this point, you’ll no longer be responsible for managing contributions, investments and other account decisions—your child will.

Learn More: Best Roth IRA Investments

A new account will be opened in your child’s name once they reach 18 or 21, and that could be a Roth or traditional IRA, depending on what makes sense for them.

Opening a Roth IRA

If you decide a custodial Roth IRA is right for your family, you can open one through many major online brokers. For instance, Fidelity, Vanguard, Charles Schwab and TD Ameritrade all offer custodial Roth IRAs.

To open an account, you’ll typically need to complete an application as a start. An application may be available online through major brokerages. On your application, you’ll include personal information like your name, address, Social Security number, driver’s license number and more. You may also need to provide this information for your child as well.

Once you mail in your application, you simply wait to receive an official notification from the brokerage that your account is active. Then you can set up an online login and start contributing.

Are Custodial Roth IRAs insured?

Similar to deposit accounts, funds in a Roth IRA are insured by the FDIC up to $250,000.[3] Since it may be a very long time before your teen accesses the funds in their custodial Roth IRA, this insurance is crucial.

If the financial firm happens to go under, your deposits in the account will be protected. This is good news whether your kiddo plans to keep the funds in their account for five, 15, or 40+ years!

Article Sources
  1. “Publication 590-B (2021), Distributions from Individual Retirement Arrangements (IRAs).” IRS.
  2. “IRS Announces Changes to Retirement Plans for 2022.” IRS.
  3. “Certain Retirement Accounts.” FDIC.

About the Author

Jess Ullrich

Jess Ullrich

Jess Ullrich is a personal finance writer who's been creating online content since 2009.

Full bio

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