Roth IRA for Kids

As a follow-up to how young workers can use a Roth IRA as a useful tool to save for retirement and establish an emergency fund at the same time, we want to share another tip on how you can help get kids involved with saving early. Now that your children or grandchildren have been home from school and in the midst of a summer job (if they are lucky this summer), you can start thinking about opening a Roth IRA in the name of a child to help him or her save for retirement, a first house, or, subject to some rules, educational expenses. They can also use the contributions made as an emergency fund when they leave the nest as we described last week. You will not only be providing a head start on saving for the above, but also the child’s education in personal finance and, where parents or grandparents are contributing the funds, hopefully the opportunity to share your values about money and the beginning of a lifelong family conversation about important personal financial issues. The child generally won’t owe taxes on the money when they withdraw it from a Roth IRA, no matter how much they have earned in the account over the years. This tax benefit is subject to one restriction: The money contributed must be held in the account for at least five years to get the full tax benefit (they can always withdraw any contributions tax-free). The most important thing to know about this is that the child must have earned income in order to have a Roth IRA in their names. You (or the child) can contribute as much as they made, up to the current $7,000 annual Roth IRA limit for 2025. You or another adult will be the custodian on the account, but the child will be the owner.

Source: ACM Wealth. Assumes $1,000 annual contribution for 7 years and a 7% annual return over 45 years.  The 7% growth assumption used in the Roth IRA for Kids chart is based on the long-term historical average annual return of a diversified stock portfolio.  Over the past 50–100 years, the U.S. stock market (e.g., S&P 500) has delivered average annual returns of around 9–10% before inflation, and approximately 6–7% after inflation.

It’s up to you (or the child) to document that they had income earned from work. Earned income does not include an allowance or a gift or unearned interest/dividend income from other investments. It’s up to the account custodian to document the service rendered, when it was done, and the payment. It also has to be a reasonable rate. Listing $1,000 for a night of babysitting isn’t reasonable and will not work.

Assuming you are following the eligibility requirements for the child’s earned income, then the contribution you make to a child’s Roth IRA can be a gift from you or someone else and will count against the annual gift tax exclusion, currently $19,000, for 2025.

For some more detail, you can check out our post from 2018 by clicking here. If you have any questions, please reach out to your ACM Wealth Advisor.

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