At a glance
- What it is
- A Roth IRA opened in your child’s name, managed by a parent as custodian, funded from the child’s earned income.
- What it saves
- Tax on decades of growth. Qualified withdrawals are tax-free.
- Best fit
- Any child with earned income.
- Main catch
- The contribution can’t exceed what the child actually earned, and the money belongs to the child.
- 2026 limit
- $7,500 or the child’s earnings for the year, whichever is less.
Key takeaways
- A kids’ Roth IRA is a custodial Roth funded from your child’s earned income, up to $7,500 or their earnings for 2026, whichever is less.
- It fits any child with earned income, including kids on your business payroll, and families starting retirement savings decades early.
- In the illustrative example, a single $7,500 contribution at 15 could grow to $351,762 by 65, assuming an 8% average annual return.
- The catch: contributions can’t exceed what the child earned, the money belongs to the child, and returns are never guaranteed.
Watch the story
A one-minute story about this strategy. Illustrative story; the people are fictional and are not clients. See all story videos.
The numbers
Picture a 15-year-old who earns wages working in a parent’s business and puts $7,500 into a custodial Roth IRA once, then never adds another dollar. At an assumed 8% average annual return, here is how that single contribution could grow ($7,500 × 1.08 for each year invested):
For illustration purposes. Tax law may change, which may change these calculations slightly.
| Age | Years invested | Account value |
|---|---|---|
| 15 | 0 | $7,500 |
| 25 | 10 | $16,192 |
| 35 | 20 | $34,957 |
| 45 | 30 | $75,470 |
| 55 | 40 | $162,934 |
| 65 | 50 | $351,762 |
That is about $344,000 of growth on a $7,500 contribution, and in a Roth IRA none of it is taxed when it comes out as a qualified withdrawal. If the wages came from your business (see Strategy 05), the same dollars were also a business deduction for you and, within the child’s standard deduction, free of federal income tax for them.
An 8% average return is an assumption, not a promise. Markets go down as well as up, and real returns vary year to year. The point is the time: a dollar invested at 15 has far longer to compound than a dollar invested at 35.
Could this strategy work for your business?
In a free tax analysis, your tax strategist checks whether it fits and what it could save, using your real numbers.
How it works
- Your child earns income. Wages from real work in your business (or another job) count. Allowances and gifts don’t.
- Open a custodial Roth IRA. Many brokerages offer them. You manage the account as custodian until your child reaches the age set by state law and the provider.
- Contribute up to the limit. Up to $7,500 for 2026 or the child’s earnings, whichever is less. The money can come from the child’s paycheck or as a gift from you, as long as the child had at least that much earned income.
- Invest it and leave it alone. Growth inside the account isn’t taxed, and qualified withdrawals in retirement are tax-free.
Who it fits
- Any child with earned income, including kids on your business payroll.
- Families who want to start a child’s retirement savings decades early.
- Kids whose income is low enough that skipping a deduction today costs little or nothing.
When it doesn’t fit
- Children with no earned income. Investment income and allowances don’t qualify.
- Families who will need the money soon. A Roth IRA is built for the long term.
The rules
- Earned income required. Contributions are capped at the lesser of the annual limit or the child’s taxable compensation for the year.
- Contribution deadline. Contributions for a tax year can generally be made up to the filing deadline the following April.
- Withdrawals. Contributions can come back out anytime without tax or penalty. Earnings are tax-free once the account has been open five years and the owner is 59½ (or meets another exception).
- It’s the child’s money. A custodial account belongs to the child, and control passes to them at the age set by state law and the provider.
Risks to weigh
- Wages that don’t hold up. If the job behind the paycheck isn’t real, both the business deduction and the Roth contribution are at risk.
- Over-contributing. Putting in more than the child earned triggers an excise tax each year until it’s fixed.
- Market risk. The account can lose value. No return is guaranteed.
How we handle it for clients
With a Cannon & Brown tax plan, we pair the Roth with your child’s payroll: we confirm their earned income each year, tell you exactly how much can go in, and remind you before the deadline so the contribution doesn’t get missed. Because our technology keeps your numbers current all year, we can test this strategy against your real numbers and adjust it as your business changes.
Illustrative example. The child and figures on this page are hypothetical, used to explain how the strategy works. They are not a client and not a promise of results. The example assumes a single $7,500 contribution at age 15 and an 8% average annual return compounded yearly, with no fees or further contributions; actual returns will differ. This page is educational and is not tax or investment advice for your situation; tax rules and limits change.
Brooks leads Cannon & Brown Tax Advisors, a forward-thinking tax firm serving business owners in Oklahoma and beyond. He builds year-round tax strategies that help business owners keep more of what they earn and reach their goals. More about Brooks
Common questions about the kids’ Roth IRA
Can I put my own money into my child’s Roth IRA?
Yes. The contribution can be a gift from you, as long as your child had at least that much earned income for the year.
Do allowances or chores count as earned income for a Roth IRA?
No. Allowances, gifts, and investment income don’t count. Wages from real work in your business, or another job, do.
Can my child take money out of a Roth IRA early?
Contributions can come back out anytime without tax or penalty. Earnings are tax-free once the account has been open five years and the owner is 59½, or meets another exception.
Who controls a custodial Roth IRA?
You manage it as custodian until your child reaches the age set by state law and the provider. Then control passes to your child, because the money is theirs.
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