Imagine your 8-year-old child spends the summer walking dogs for a few hundred dollars. Instead of spending it, or even putting it in a basic savings account, you open a retirement account in their name. You’re not only helping them save, but you’re also building a nest egg for their retirement decades from now.
More U.S. parents are doing just that by setting up custodial versions of the Roth IRA for young children with earned income. With long time horizons and favorable tax rules, and questions about the fate of Social Security, it just makes sense.
What Is a Custodial Roth IRA for a Child?
Roth IRAs are retirement accounts funded with after-tax dollars. A “custodial Roth IRA” is just a Roth IRA opened in a child’s name and managed by a parent or guardian (the custodian) until the child reaches legal adulthood.
All the child needs to be eligible is some form of earned income during the year. And since employment for children under the age of 15 is hard to come by at many employers, that will probably look like gigs such as babysitting, dog walking or lawn-care work. In some cases, if a family has its own business, you can also hire your children.
For 2026, the contribution limit is either the child’s earned income for the year or $7,500 (for individuals under age 50) whichever is less.
There’s no minimum age for the account, so theoretically even an 8-year-old qualifies if they earned income during the year.
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Why Parents Are Starting Them for 8-Year-Olds
If it seems silly to set up a retirement account for someone so young, consider the benefits:
Compound Growth
The funds in a Roth IRA grow exponentially through the power of compound interest. A contribution made at age 8 can grow over 50 or more years, benefiting dramatically from time.
Tax-Free Growth on Withdrawals
You’re setting your child up for future income, tax-free. The Roth account allows qualified earnings to be withdrawn tax-free in retirement.
Tax Strategy and Flexibility
Many children today are taxed at very low rates (or not at all), which means paying tax now may make more sense, especially if they anticipate higher earnings later in life.
Financial Education
Opening this type of account is a useful way to give kids a practical, real-life lesson on earned income, investing and long-term thinking.
For parents of young children, the numbers should persuade you: If the child legitimately earns income now, you’re giving them a head start instead of waiting until college or adulthood.
Considerations and Potential Pitfalls
While there are many benefits to the custodial Roth IRA, there are some considerations and potential pitfalls that parents and guardians need to think about:
- If the child has no earned income, you can’t contribute to a Roth IRA in their name for that year. Allowances or gifts also don’t count.
- The contribution limit can’t exceed the child’s earned income for that year. So if a child only earns $300 from odd jobs, that’s all you can contribute.
- Not all brokers offer custodial Roth IRAs for minors; you may need to shop around.
- Money in such accounts is primarily for long-term growth. If the child needs the money soon (such as for college), other vehicles, like 529 plans or custodial brokerage accounts, might make more sense.
- Financial aid implications: While assets held in a Roth IRA for kids might not directly count in the federal aid formula, withdrawals later could affect eligibility.
A Checklist for Getting Started
Here are the steps to take if you plan to open a custodial IRA for your child:
- Confirm earned income for the child this year. Keep a record or log even if there is no W-2.
- Open the custodial Roth IRA at a brokerage that allows minor accounts, naming the parent or guardian as custodian.
- Make contributions up to the lesser of the child’s earned income or the annual limit ($7,000 for 2025). For example, if the child earns $1,000, you can contribute up to $1,000.
- Choose investments with a long-term mindset. With decades of time to grow these funds, your child’s risk tolerance may be higher.
- Understand rules: Contributions (but not earnings) can typically be withdrawn anytime tax- and penalty-free. Earnings withdrawn early may incur taxes/penalties unless rules met.
- Transition at adulthood: Once the child reaches the age of majority (often 18 or 21, depending on state), control transfers to them. Be prepared to help them take control of this account.
Opening a Roth IRA for an 8-year-old might feel strange, but it’s a great way to give that child a head start in building financial freedom.
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This article originally appeared on GOBankingRates.com: Why Parents Are Opening Roth IRAs for 8-Year-Olds
