Should You Open a Roth IRA for Your Child?

8 April 2025

Saving for your child’s future is one of the best gifts you can give them. With college tuition rising and financial independence becoming harder to achieve, many parents look for ways to provide a financial head start. One option that often gets overlooked is opening a Roth IRA for your child.

Now, you might be wondering, “Isn't an IRA for retirement? Why would my kid need one?” That’s exactly what we’re going to break down in this article. Let’s dive into whether a Roth IRA makes sense for your child and how it can become a powerful wealth-building tool.

What Is a Roth IRA?

A Roth IRA (Individual Retirement Account) is a tax-advantaged investment account designed to help individuals grow their wealth for retirement. Unlike a traditional IRA, where contributions are tax-deductible, a Roth IRA is funded with after-tax money. This means that:

✔️ Your contributions grow tax-free.
✔️ You can withdraw your earnings tax-free in retirement (as long as certain conditions are met).
✔️ You can always withdraw your contributions without penalties.

For adults, it’s an excellent way to build a nest egg for later years. But for kids? Well, it turns out they can benefit too—perhaps even more than adults!

Can a Child Have a Roth IRA?

Yes! However, there’s one key requirement: your child must have earned income. This means they need to make money from a job, whether it’s babysitting, mowing lawns, acting in commercials, or working at a family business (as long as it's legal and properly documented).

If your child earns money, they can contribute up to the IRS limit for Roth IRAs, which is $7,000 in 2024 (or the total amount they earned, whichever is lower).

That means if your 12-year-old makes $3,000 from summer jobs, they can contribute up to $3,000 into a Roth IRA.

Benefits of Opening a Roth IRA for Your Child

So why would you open a retirement account for a child who’s decades away from retiring? The answer is simple: time + compound interest = massive growth potential. Let’s break down the benefits.

1. Tax-Free Growth & Withdrawals

With a Roth IRA, earnings grow tax-free, and qualified withdrawals after age 59½ are also tax-free. Since children typically have low or no tax liability, paying taxes upfront (rather than later in retirement) makes sense.

Imagine starting an account when your child is 10 years old. If they contribute just $1,000 per year for 10 years and never add another dime, that money could grow to over $200,000 by the time they’re 60 (assuming an average 8% return). That’s the power of time and compounding!

2. Flexibility – It's Not Just for Retirement

One misconception is that Roth IRAs are strictly for retirement. While that’s their primary purpose, they also offer important exceptions:

- Contributions Can Be Withdrawn Anytime – Unlike a 401(k) or traditional IRA, your child can withdraw the money they put in (just not the earnings) at any time without penalties or taxes.
- Penalty-Free Withdrawals for Major Life Events – Roth IRA funds can be used for education expenses or even a first-time home purchase (up to $10,000 in earnings, penalty-free).
- Funds Can Help with Emergencies – Though not recommended, the account could serve as a financial cushion in case of unexpected expenses.

Essentially, a Roth IRA could double as a college savings fund or a home-buying fund while still being a retirement powerhouse.

3. Financial Education & Responsibility

Teaching kids about money is crucial. By opening a Roth IRA, you’re introducing them to investing, saving, and financial planning early—skills that will serve them for life.

A child with a Roth IRA gets an early introduction to:

✔️ How investing works
✔️ Why compound interest is a game-changer
✔️ How to think long-term with money

This is a lesson most people don’t learn until adulthood—sometimes after making costly financial mistakes.

4. Avoid Hurting College Financial Aid

When applying for college financial aid (via FAFSA), assets in a parent-owned 529 plan or savings account can reduce eligibility significantly. However, assets in a Roth IRA don’t count against financial aid calculations because retirement accounts aren’t included in the FAFSA formula.

This makes a Roth IRA a stealthy way to save for a child's future without negatively impacting their ability to receive financial assistance.

5. No Required Minimum Distributions (RMDs)

Unlike traditional IRAs, Roth IRAs don’t require withdrawals at a certain age. This means your child can let their money grow tax-free indefinitely, allowing for greater financial flexibility later in life.

Are There Any Downsides?

Of course, no financial strategy is perfect. Here are a few potential drawbacks:

❌ Must Have Earned Income

If your child doesn’t have a job that provides earned income, they won’t qualify for a Roth IRA. Allowance or gifted money doesn’t count.

❌ Limited Contribution Amount

Your child can only contribute the amount they earn (up to $7,000 in 2024). If they make just $2,000 in a year, that’s the max they can put in.

❌ Long-Term Commitment

The biggest benefit of a Roth IRA is long-term growth. If your child withdraws funds early, they miss out on decades of compounding and wealth-building.

How to Open a Roth IRA for Your Child

If you decide this strategy is right for your family, here’s how to get started:

✅ Step 1: Confirm Eligibility

Make sure your child has earned income that you can document (W-2 job, self-employment, or business earnings).

✅ Step 2: Choose a Custodial Roth IRA

Since your child is a minor, they can’t open an IRA independently. You’ll need to open a custodial Roth IRA, which you’ll manage until they reach adulthood (usually 18 or 21, depending on the state). Some popular providers include:
- Fidelity
- Vanguard
- Charles Schwab

✅ Step 3: Fund the Account

Your child (or you, on their behalf) can contribute up to the amount they’ve earned in the year.

✅ Step 4: Invest the Money

Simply depositing money in the account isn’t enough. You need to invest it in stocks, index funds, or ETFs to take advantage of tax-free growth.

✅ Step 5: Teach Smart Money Habits

As the account grows, involve your child in managing it. Show them their earnings, explain market movements, and encourage long-term thinking.

Is a Roth IRA for Your Child Worth It?

Absolutely—if your child has earned income and you want to help them build a tax-free wealth foundation for the future.

A Roth IRA can:
✔️ Grow tax-free for decades
✔️ Be used for retirement, education, or a home purchase
✔️ Teach valuable financial lessons early
✔️ Provide flexibility if needed in the future

While not every family will find this approach beneficial, those who start early can give their children a financial leg up that pays off tremendously over time.

So, should you open a Roth IRA for your child? If they qualify, the answer is a resounding yes!