In this guide
- Custodial Roth IRA rules: what the account is
- The earned-income rule
- Can you open a Roth IRA for a child with no income?
- At what age can you open one?
- Paying your child through the family business
- Entity type decides the payroll tax
- Payroll mechanics: W-4, W-2 and filings
- A worked example
- Documentation that holds up
- Custodian control and the age-of-majority handover
- Getting money out before retirement
- The disadvantages of a Roth IRA for a child
- 529 vs Roth IRA for a child
- What a few teenage contributions can become
- How to set it up
Custodial Roth IRA rules: what the account is
A custodial Roth IRA is an ordinary Roth IRA under IRC §408A with one difference: the owner is a minor, so an adult signs the account agreement and makes the decisions. The child's name and Social Security number are on the account. The parent, grandparent or other adult acting as custodian has authority over investments and paperwork, but owes that authority to the child. Nothing in the tax treatment changes: contributions are after-tax, growth is tax-free, and qualified distributions under IRS Publication 590-B are tax-free.
This guide is about minors. If your child is already 18 or older, the account is theirs to open and the question becomes how to fund it; that is covered in funding a Roth IRA for an adult child.
The earned-income rule
Every Roth question for a child comes back to one sentence in the code. Under §408A(c)(2), which borrows the limit in IRC §219(b)(1), the annual contribution cannot exceed the lesser of the dollar limit or the owner's compensation includible in gross income. For 2026 the dollar limit is $7,500, per IRS announcement IR-2025-111. A child who earned $2,300 can put in $2,300. A child who earned $40,000 can put in $7,500.
"Compensation" takes its meaning from §219(f)(1), which includes earned income as defined for self-employment purposes, and IRS Publication 590-A spells it out: wages, salaries, tips, commissions, professional fees, taxable scholarship and fellowship pay, and net earnings from self-employment. It does not include gifts, allowances, interest, dividends, capital gains, UTMA account income, or pension and annuity income. Three consequences follow:
- The money does not have to be the child's paycheck. If a 15-year-old earned $5,000 and spent it, you can give them $5,000 and they can contribute it. The compensation sets the ceiling; the source of the dollars is irrelevant.
- The compensation has to be real. Chores at home paid as an allowance are not wages. Babysitting, lawn work, tutoring and paid content creation count if the work was actually performed and paid for, but they are self-employment income rather than wages.
- Self-employment income carries its own filing trigger. A child with $400 or more of net self-employment earnings must file a return with Schedule SE and owes self-employment tax, even when income tax is zero. For IRA purposes, Publication 590-A measures self-employment compensation as net earnings reduced by the deduction for one-half of self-employment tax, so a teenager with $3,000 of net babysitting income has slightly less than $3,000 of Roth room. Keep a simple ledger of who paid, when and how much.
The Roth income phase-out, $153,000 to $168,000 of MAGI for single filers in 2026, applies to the child's income, not yours. For a minor it rarely matters. What does matter is that the parents' income is irrelevant: a family with seven-figure earnings can fund a child's Roth as long as the child has the compensation.
Contributing more than the child earned creates an excess contribution, which triggers a 6% excise tax under IRC §4973 for every year it stays in the account. The fix is covered in our guide to correcting an excess Roth IRA contribution.
Can you open a Roth IRA for a child with no income?
No. This is the most common question behind the search, and the answer is unconditional: a child with no earned income has a Roth contribution limit of zero. Nothing a parent does, including gifting the money, paying an allowance, or calling household chores a job, changes that. The account can technically be opened with no deposit at some firms, but it cannot be funded until the child has compensation, and a contribution made without it is an excess contribution from day one.
For a child who does not yet earn, the alternatives are a 529 plan, a UTMA account or a taxable account in the parent's name. Each has its own trade-offs, discussed in the 529 vs Roth IRA section below. The Roth becomes available the first year the child has wages or self-employment income, and in that year the limit is whatever the child earned, not the $7,500 ceiling.
At what age can you open a Roth IRA for a child?
At any age; federal law sets no minimum. A newborn with legitimate income from modelling or a commercial can contribute up to that income. The practical floor is the age at which a child can do work that a reasonable person would pay for. Child performers carry an extra layer in some states: California's Coogan law, Family Code §6752, requires 15% of a minor's gross earnings under a court-approved entertainment contract to be set aside in a blocked trust account until the child turns 18, so check state rules before assuming the full amount is available to contribute.
Can a 16-year-old open a Roth IRA? Yes, with a custodian. A 16-year-old with a summer job, a part-time W-2 or self-employment income can contribute up to the lesser of that income or $7,500 for 2026, and the parent opens the account and manages it until the handover age. The same answer applies at 14, 15 and 17. The age that matters is the age of majority, because that decides who signs. Until then, the account must be custodial. A child can hold a custodial Roth alongside other Roth accounts later in life, and the annual limit applies across all of them; see whether you can have multiple Roth IRAs.
Paying your child through the family business
For readers who own an operating business, wages are the most reliable way to create compensation and usually the most tax-efficient. The logic has three parts.
First, the business deducts "a reasonable allowance for salaries or other compensation for personal services actually rendered" under IRC §162(a)(1). Both halves of that phrase are tested: the work must have happened, and the pay must match what an unrelated person would be paid for it. A dollar that clears both tests is shifted from your marginal rate to the child's.
Second, the child's earned income is sheltered by the standard deduction. Under Rev. Proc. 2025-32, a dependent's 2026 standard deduction is the greater of $1,350 or earned income plus $450, capped at the regular single amount of $16,100. A child with $7,500 of wages therefore has a $7,950 standard deduction and owes no federal income tax. Wages up to $16,100 are covered; above that, the next $12,400 of taxable income is taxed at 10%. The kiddie tax does not apply to wages, because it reaches only unearned income; for 2026 it starts once a child's unearned income passes $2,700 (twice the $1,350 amount in the same revenue procedure).
Third, depending on how the business is organised, the wages may also escape payroll tax. That is where the entity decision comes in.
Entity type decides the payroll tax
The IRS's guidance on family employees and Publication 15 set out the treatment by business type:
| Who employs the child | Social Security & Medicare | FUTA | Income tax withholding |
|---|---|---|---|
| Parent's sole proprietorship | Exempt until age 18 | Exempt until age 21 | Applies |
| Single-member LLC owned by a parent and disregarded for income tax | Exempt until age 18 | Exempt until age 21 | Applies |
| Partnership (or multi-member LLC taxed as one) in which every partner is a parent of the child | Exempt until age 18 | Exempt until age 21 | Applies |
| Partnership or LLC with any non-parent member | Applies at any age | Applies | Applies |
| S corporation or C corporation, even if wholly owned by a parent (including an LLC that elected corporate status) | Applies at any age | Applies | Applies |
| An estate, including a deceased parent's estate | Applies at any age | Applies | Applies |
"Withholding applies" means the wages are subject to the withholding regime, not that tax will necessarily be withheld; a child who had no tax liability last year and expects none this year can claim exemption on Form W-4. The single-member LLC row comes from Treas. Reg. §31.3121(b)(3)-1(d): although a disregarded LLC is treated as a corporation for employment-tax filing, the regulation treats the LLC's owner as the employer when applying the family exception, so a parent's disregarded LLC keeps the exemption while an LLC that has elected S-corporation status does not. The LLC still files the Forms 941 and W-2 under its own EIN.
The decision rule: in an S corporation the child's wages cost 7.65% employer FICA plus 7.65% withheld from the child, about $1,148 on $7,500 of pay. That is usually still worth paying when the deduction is worth 35% or more to the owner, but it narrows the margin. In a sole proprietorship or disregarded LLC the payroll tax disappears for a child under 18.
Payroll mechanics: W-4, W-2 and filings
FICA-exempt does not mean paperwork-exempt. A child employee goes through the same payroll steps as any other hire, with the exemptions applied inside the system:
- Onboarding. Form W-4 (the child may claim exempt from income-tax withholding if eligible) and Form I-9. A business with no employees yet needs an EIN and a state employer registration.
- Payroll runs. Pay on a regular schedule, by cheque or direct deposit into an account in the child's name, with a pay stub showing hours and rate. In a sole proprietorship or disregarded LLC, the payroll software should be set to exempt the child from Social Security, Medicare and FUTA; most providers have a "child of owner" flag.
- Quarterly and annual filings. Form 941 (or 944) each quarter, state withholding and unemployment returns as required, and Form 940 if the business has other employees. The child's exempt wages are reported, not omitted.
- Form W-2 by January 31. Issue a W-2 even though no FICA was due: Box 1 shows the wages, Boxes 3 and 5 are blank or zero when the family exemption applies. The W-2 is the document the Roth contribution rests on, and it is what the child files with a return if one is needed.
- The child's return. Not required when wages are below the standard deduction and nothing was withheld, but filing is harmless and creates a record that matches Form 5498 from the IRA custodian.
A worked example
A married owner files jointly with taxable income in the 35% bracket, $512,450 to $768,700 for 2026. Their 15-year-old works in the parent's sole proprietorship through the summer and on weekends: 300 hours of scanning records, social-media scheduling and inventory counts at $25 an hour, a rate the parent can show is close to what a local temp would cost. Total wages: $7,500.
| Item | Amount |
|---|---|
| Wages paid to child (W-2) | $7,500 |
| Parent's federal income tax saved (35% × $7,500) | $2,625 |
| Social Security and Medicare on child's wages | $0 (sole proprietorship, child under 18) |
| Child's standard deduction ($7,500 + $450) | $7,950 |
| Child's federal income tax | $0 |
| Custodial Roth contribution | $7,500 |
The parent also saves the self-employment tax that would have applied to that $7,500 of net earnings; at this income level that is typically the Medicare portion only. State tax effects vary and are excluded. Compare the alternative: to give the child $7,500 of after-tax money for a Roth, a parent in the 35% bracket needs roughly $11,500 of pre-tax income. Paying wages for real work moves the same $7,500 into the child's hands from pre-tax dollars.
The Saver's Credit does not help here. Under IRC §25B(c), an eligible individual must be 18 by year-end and cannot be a student or someone else's dependent, which rules out almost every child in this article.
Documentation that holds up
The deduction stands or falls on two facts the IRS will test: the work was performed, and the pay was reasonable for it. Young children are where this breaks down. A 7-year-old paid $7,500 to "help in the office" invites a disallowance, and if the wages are disallowed, the Roth contribution can become an excess contribution too. The leading case is Eller v. Commissioner, 77 T.C. 934 (1981), where the Tax Court accepted that wages paid to the owners' children, the youngest aged seven, were deductible for work actually done in the family business, but allowed only the amounts it found reasonable for the services and rejected the rest. Later decisions follow the same pattern: deductions survive where there are records of hours and tasks, payment through payroll and pay in line with the market, and fail where the amount was fixed in advance, unrelated to work performed, or covered ordinary household chores. The cases turn on evidence rather than principle. A file that survives review has:
- A written job description for age-appropriate tasks the business actually needs.
- Contemporaneous timesheets: dates, hours and tasks, kept as the work happens, not reconstructed in April.
- A rate benchmark, such as a staffing-agency quote or local job posting for the same work.
- Payment through payroll into an account in the child's name, with a W-2 at year-end and the usual employer filings.
- Compliance with child-labour rules. Under the Fair Labor Standards Act, DOL Fact Sheet #43 confirms that children of any age may work for a business entirely owned by their parents, except in mining or manufacturing under 16 and in occupations declared hazardous under 18. The exemption is for businesses entirely owned by the parents, so it does not cover a company with outside shareholders. State rules on hours, work permits and age minimums are often stricter and apply alongside federal law.
Paying a round $7,500 on December 31 because that happens to be the IRA limit is the pattern most likely to draw attention. Pay as the work is done, at the rate it is worth, and let the contribution follow the total.
Custodian control and the age-of-majority handover
A custodial Roth works much like a UTMA account. The custodian chooses the investments, can make deposits and, in most account agreements, can request distributions for the child's benefit. The custodian cannot use the assets for their own purposes or take the money back. Once contributed, it belongs to the child, and if you supplied the cash, the transfer is a completed gift. A $7,500 contribution sits inside the 2026 annual gift-tax exclusion of $19,000 per recipient set by Rev. Proc. 2025-32.
The handover age is a matter of state law and the brokerage's account agreement, not the tax code. Most states transfer custodial accounts at 18 or 21, some allow the person who opens the account to pick an age within a range, and the age for a custodial IRA can differ from the UTMA age in the same state. Check the account agreement when you open it; that is the number that will be enforced.
When the child reaches the age set by state law and the account agreement, usually 18 or 21, the custodian's authority ends. The child can then invest, withdraw or move the account without anyone's consent. This is a change of control, not a taxable event: nothing is distributed, and the account's contribution history and its Roth five-year clock carry over. Most firms require the young adult to re-register the account in their own name; procedures and timing vary by custodian.
For families who worry about an 18-year-old with a five-figure account, the plain answer is that the tax code offers no way to keep control past the handover age inside an IRA. Where that is a real concern, keep contributions modest and talk about the account well before the handover.
Getting money out before retirement
A child's Roth is more liquid than people assume. Under the ordering rules in §408A(d)(4) and Publication 590-B, regular contributions come out first, and they come out free of tax and penalty at any age and for any reason. Only earnings are at risk:
- Qualified distributions of earnings are tax-free once the account has met the five-year rule and the owner is 59½, disabled, or using up to $10,000 lifetime for a first home. The rules are explained in our Roth IRA five-year rule guide.
- Non-qualified earnings are taxable and, unless an exception applies, subject to the 10% additional tax; qualified higher-education expenses are one exception to the penalty but not to the income tax. See the Roth IRA early withdrawal penalty for the full list.
That ordering only works if someone can prove what was contributed. Keep each year's Form 5498 and the child's W-2s together; when the child is 30 and needs to show basis, those records are the evidence. Our guide to Roth IRA basis explains how to track it and rebuild it if records are lost.
The disadvantages of a Roth IRA for a child
The search results for this topic are almost uniformly enthusiastic, so it is worth listing what the account costs you in return for decades of tax-free growth:
- Loss of control. At 18 or 21 the child can withdraw every dollar of contributions penalty-free and spend it. The tax code gives you no mechanism to delay that inside an IRA. A trust can impose conditions; a Roth cannot.
- Scale is limited by the child's earnings. Even a well-paid teenager tops out at $7,500 a year. Families looking to move large sums to the next generation use other tools; the Roth is a complement, not the vehicle.
- Real administrative work. Creating compensation through a family business means payroll, filings, timesheets and a defensible rate. Done casually, it creates a disallowed deduction and an excess contribution at the same time.
- Earnings are locked up. Contributions come out freely, but earnings withdrawn before 59½ are generally taxable and subject to the 10% additional tax unless an exception applies. For a child, the five-year clock is a minor issue; the age test is not.
- Financial-aid interactions are not zero. Retirement accounts are not reported as assets on the FAFSA, which is a point in the Roth's favour against a UTMA, but the taxable portion of a non-qualified distribution taken during college flows into adjusted gross income, which a later aid application uses. Treat the account as retirement money and the problem does not arise.
- Irrevocable gift. If you supply the cash, it is the child's the moment it is deposited. There is no taking it back if circumstances change.
529 vs Roth IRA for a child
The two accounts are usually presented as rivals. They are better understood as sequential: a 529 can be opened the week a child is born and funded in large amounts with no earned-income test, while a Roth cannot exist until the child earns. The useful comparison is on the dimensions where they differ.
| Feature | 529 plan | Custodial Roth IRA |
|---|---|---|
| Earned income required | No | Yes; contribution capped at child's compensation |
| 2026 contribution ceiling | Gift-tax limits only ($19,000 per donor, or five-year election of $95,000) | Lesser of earned income or $7,500 |
| Who controls it | Account owner (usually the parent), indefinitely | Custodian until 18 or 21, then the child |
| Tax-free use | Qualified education expenses | Retirement; contributions withdrawable any time |
| Penalty on non-qualified use | Tax plus 10% on the earnings portion | Tax plus 10% on earnings only; contributions never penalised |
| Financial-aid reporting | Parent asset on the FAFSA (assessed at a low rate) | Not reported as an asset |
| Link between them | After 15 years, leftover 529 funds can roll to the beneficiary's Roth IRA, up to $35,000 lifetime, counting against the annual limit and still requiring earned income | |
A common sequence for a family that can afford both: fund the 529 early, start the Roth in the first year the child has wages, and treat the 529-to-Roth rollover as the release valve for whatever education money is left over. The rollover rules are detailed in our 529-to-Roth IRA guide.
What a few teenage contributions can become
The value of a child's Roth is time, not the size of the deposits. Take the question search engines surface most often, how much $5,000 in an IRA would be worth in 20 years. As plain compound arithmetic, a single $5,000 deposit becomes about $13,300 after 20 years at a constant 5%, $19,300 at 7% and $33,600 at 10%, before fees and taxes. Repeating the $5,000 every year for 20 years reaches roughly $165,000 at 5% or $205,000 at 7%. Those are illustrations of a fixed rate, not forecasts, and the same arithmetic produces the table below, which assumes one $7,500 contribution a year for the ages shown, nothing after, and a constant nominal return, with no fees or taxes.
| Contribution years | Total contributed | Value at 65 at 5% | Value at 65 at 7% |
|---|---|---|---|
| Ages 16–18 (3 years) | $22,500 | ≈ $234,000 | ≈ $580,000 |
| Ages 14–18 (5 years) | $37,500 | ≈ $411,000 | ≈ $1,037,000 |
| Ages 10–18 (9 years) | $67,500 | ≈ $819,000 | ≈ $2,160,000 |
Investment returns are not guaranteed, accounts can lose value, and nominal figures 50 years out overstate purchasing power. The point the table makes is about relative value: contributions at 14 have roughly twice as many compounding years as contributions at 40. If you also hold a 529 for the child, leftover funds can later move to the same Roth under the rules in our 529-to-Roth IRA rollover guide, subject to the same annual limit and earned-income test. To model your own Roth timeline, use the Nest Planner calculators.
How to set it up
- Confirm the child's compensation for the year: W-2 wages, or a ledger of self-employment income with any required return. No compensation means no contribution, whatever the source of the cash.
- Open a custodial Roth IRA at a brokerage that offers one, with the child as owner and you as custodian. You will need both Social Security numbers.
- Contribute no more than the lesser of the child's compensation or $7,500, from the child's pay or a gift from you.
- Make the deposit by the filing deadline, April 15, 2027 for 2026 contributions, and designate the tax year.
- File the child's return if required or if withholding should be refunded, and keep the W-2, timesheets and Form 5498 together.
- Diary the age-of-majority date and plan the handover conversation.
This article explains federal rules for education only. It is not tax, legal or investment advice, and does not recommend any investment or account provider. Employment of a family member, state law and payroll treatment should be confirmed with a qualified adviser.