If your child just got their first job, they may not be thinking about retirement. But this doesn’t mean they can’t start saving for their Golden Years right now. And that could give them an exceptional head start. Think about what your child can accomplish with 50-plus years of compounding interest.
So, how do you start?
As long as your child has some kind of earned income from a W-2 job or self-employment income through activities like babysitting, they can benefit from a Roth IRA (individual retirement account).
But you can also open a custodial Roth IRA. You would manage the account yourself, including the investments. Once your child reaches the age of maturity (18 or 21, depending on the state), they can manage the account on their own.
What Is a Roth IRA?
A Roth IRA is a type of retirement savings account with distinct tax advantages. The money you contribute into a Roth IRA grows tax-free. And withdrawals are also tax-free as long as the account has been open for at least five years and the account holder is at least 59 1/2 years old.But if you withdraw earnings from a Roth IRA without meeting those rules, you’ll face income taxes and a 10 percent penalty.
But one point that sets Roth IRAs apart from their traditional counterparts is that your child may withdraw contributions at any time without penalty or tax burden.
Your child also may withdraw up to $10,000 from a Roth IRA for a first-time home purchase without paying income taxes or a penalty, as long as the account has been open for at least five years.
Roth IRA Contribution Limits
For 2025, you can contribute up to $7,000 to a Roth IRA. Those aged 50 or older can make “catch-up” contributions of $1,000 for a total of $8,000.However, your child’s ability to make the full contribution depends on their modified adjusted gross income (MAGI).
- Single: Contributions are lowered if your MAGI is between $150,000 and $165,000. You can’t contribute at all if your MAGI is $165,000 or more.
- Married filing jointly or surviving spouse: Contributions are lowered if your MAGI is between $236,000 and $246,000. You can’t contribute at all if your MAGI is $246,000 or more.
How to Choose the Right Roth IRA
You can open a Roth IRA easily online through a bank or brokerage company. But don’t just go with the first one that catches your eye. Roth IRA providers differ widely. So you’re going to want to pay attention to points like investment options, fees, and research tools.Some securities you can commonly use to build a Roth IRA portfolio with include stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), precious metals, commodities, and cryptocurrency.
Risks of a Custodial Roth IRA
While a custodial Roth IRA can be a great way to give your child a head start on saving for retirement, it can come with some key risks. For starters, your child will assume full control of the account once they reach the age of majority. This doesn’t mean they will continue saving responsibly. This is why it may be a good idea to manage the account with them by your side in order to teach your child about the value of long-term saving and investing.The Bottom Line
Opening a custodial Roth IRA for your child with earned income can be a great way to show them the value of compound interest at a very young age.Think about it. Say you contribute $5,000 to fund a Roth IRA for your child. After 50 years, that could grow to $586,954.26, assuming a 10 percent return rate. And that’s assuming you and your child don’t make any additional contributions in that time.
Of course, you and anyone else can gift contributions toward the custodial Roth IRA at any time. It may be a good idea to ask for donations toward the Roth IRA during birthdays and holidays. That way, your child can see the impact of compounding.
It’s also important to keep your child in the loop about investment decisions. This can give them knowledge of how the markets work, as well as discipline.
