A custodial Roth IRA (section “Roth IRA”) is the single highest-leverage account a child can own, for one reason: time. A single $7,500 contribution made at age 12, left untouched for 50 years at a 7% real return, grows to roughly $220,000 — none of it ever taxed. Fund the account every year the child works through high school and the balance runs comfortably into seven figures by retirement. Because the child sits in the 0% bracket, the contribution is effectively pre-tax money going into an account that is then never taxed again — a combination no adult earner can replicate.
The one prerequisite that gates everything: real earned income. A child can contribute the lesser of the annual limit ($7,500 in 2026) or their earned income for the year. No earned income, no contribution — allowances, gifts, investment income, and “management fees” invented on a spreadsheet do not count. The income must be genuine compensation for services the child actually performed. Eligible sources:
Administrative, clerical, or operational work performed for a parent’s business, paid at a wage reasonable for the services (section “The “Incorporate Your Kids” Myth”).
Babysitting, lawn mowing, tutoring, or pet sitting, where the child is paid directly by neighbors or clients.
Modeling, acting, or ordinary corporate employment, reported on a Form W-2.
All employment must comply with state and federal child-labor law under the Fair Labor Standards Act (FLSA); IRS Pub. 590-a, “Contributions to Individual Retirement Arrangements (IRAs)” sets out what qualifies as compensation for IRA purposes.
Document the income so it survives an audit. The earned-income claim is what the IRS attacks, so build the file before you fund the account:
Open and fund the account. Any major brokerage offers a custodial (“minor”) Roth IRA. A parent or guardian opens it as custodian, controls the investments, and the account converts to the child’s sole control at the age of majority (18 or 21, by state). The contribution deadline is the tax-filing deadline of the following year (April 15). The decisive parental lever is who supplies the cash: the contribution may come from anyone, so long as total contributions do not exceed the child’s earned income for the year. In practice the child does $7,500 of real work and keeps the wages, while you fund the Roth from your own pocket as a gift — the earned income unlocks the contribution room; it need not be the literal dollars deposited.
Why the Roth never triggers kiddie tax — and stays flexible. The kiddie tax (section “The Kiddie Tax and Custodial Accounts”) reaches a child’s unearned income in a taxable account. Inside the Roth, growth and qualified distributions are tax-free and never surface as the child’s income at any rate. And because original Roth contributions (not earnings) can be withdrawn tax- and penalty-free at any time, the account doubles as a backstop for a first home or college without the lockup of a 529 (section “Roth IRA”). The trade-off is honest: money in the Roth is no longer available for the family’s general use, and the child gains legal control at majority.
Where it goes wrong. Contributing more than the child’s earned income creates an excess contribution that draws a 6% annual excise tax until corrected. Fabricated or undocumented “work,” above-market wages, and paychecks that never actually leave the parent’s account are the failure modes that convert a legitimate strategy into a deficiency notice with penalties.