How To Start A Custodial Roth IRA For Your Child In 12 Steps

Starting a custodial Roth IRA for your child may be one of the smartest financial decisions you’ll ever make. This type of account not only introduces them to long term investing but also harnesses the power of compound growth, tax-free. Whether your child earns money babysitting, tutoring, or working part time, their early earnings can become a future goldmine.

Make Sure Your Child Has Earned Income

The most crucial eligibility requirement: your child must have earned income. This includes jobs like dog walking, part-time shifts, or online tutoring. Unearned income, like allowances or gifts, doesn’t count. Document their work and keep simple records like invoices, spreadsheets, or 1099s if freelancing. This ensures IRS compliance.

Understand Custodial Roth IRA Rules

Photo Credit : AndrewLozovyi/Depositphotos

A custodial Roth IRA is a retirement account created for a minor, with a parent or guardian acting as the custodian. This means you control the account until your child reaches the age of majority, usually 18 or 21, depending on your state. However, the money belongs to them from day one. Contributions must not exceed the child’s earned income or the IRS limit $7,000 for 2025.

Choose a Reputable Brokerage

Selecting the right brokerage firm to open a custodial Roth IRA is a critical early decision. Reputable institutions like Vanguard, Fidelity, and Charles Schwab offer low cost, easy to navigate custodial accounts with solid educational resources. Look for platforms that charge no maintenance fees, have good customer service, and allow automatic investing.

Open the Custodial Roth IRA Account Online

Most brokerages allow you to open a custodial Roth IRA online in under 30 minutes. You’ll need to provide basic information like your Social Security number, your child’s SSN, address, and details about their income. Navigate to the section for custodial IRAs, and designate yourself as the custodian. Read the terms carefully, particularly when control will transfer to your child.

Fund the Account with Your Child’s Earnings

Once the account is open, you can start contributing, but only up to the amount your child earned that year. If they made $2,000 mowing lawns or babysitting, you can match up to $2,000. This money doesn’t have to come directly from their bank account. Parents can gift the contribution on their behalf, as long as it aligns with the earned income rule.

Tired of money feeling messy? Get clear, simple tips for managing your family’s finances, straight to your inbox. Sign Up Here

Keep Clear Income Records for the IRS

Photo Credit: DimaKozitsyn/Depositphotos

Even if your child isn’t filing a tax return, keeping clear records of their income is essential. Maintain simple logs, invoices, or spreadsheets documenting each job, date, and payment received. Encourage them to track hours and payments for informal work like babysitting or dog walking. This documentation won’t just satisfy the IRS, it’ll teach accountability and professionalism.

Choose Long-Term Investment Options

With the account funded, it’s time to invest the money for long term growth. Avoid letting it sit in cash, which earns little to no return. Instead, look into low cost index funds, total market ETFs, or target date retirement funds that automatically adjust risk over time. These options offer diversification and simplicity, perfect for young investors.

Teach the Basics of Compound Interest

Compound interest is the secret sauce of long term wealth building, and your child must understand it. Show them how $1,000 invested at a 7% return could become over $7,000 in 40 years. Use online calculators to bring this to life visually. When kids see how money grows over time, they begin to understand the power of consistency.

Reinvest Dividends Automatically

To automatically reinvest, make sure any dividends earned from investments are set. This means instead of getting a small cash payout, the money is used to buy more shares of the investment. Over time, this leads to exponential growth. It’s a hands-off strategy that ensures every dollar works as hard as possible. Most brokerages have a simple setting you can enable with one click.

Don’t Withdraw Early—Preserve the Power

Roth IRAs allow for penalty free withdrawals in some cases, like education or a first home. But the magic happens when you leave the money untouched. Teach your child that this isn’t a regular savings account. It’s not for sneakers, concerts, or impulse buys. This money is meant to work quietly for years, compounding with every tick of the clock.

Want budgeting tips that actually work with a toddler on your hip? This is for you.

Make Contributions a Habit, Not a One-Off

Don’t just make a single deposit and forget about it. The real power of a Roth IRA lies in consistent contributions over time. Build a routine around it, even if it’s only a few hundred dollars a year. Tie it to achievements, like completing a summer job, finishing a school year, or getting their first paycheck. This turns saving into a ritual, not a chore.

Transfer Control When They Reach Adulthood

At age 18 or 21, depending on your state, control of the custodial Roth IRA legally passes to your child. Prepare them for this moment by involving them in the process early. Talk about goals, investment strategies, and how to handle this newfound responsibility. It’s a rite of passage that can either empower or overwhelm.

Starting a custodial Roth IRA for your child in 2025 is more than a financial move; it’s a declaration of belief in their future. Each step plants seeds for lifelong security, independence, and opportunity. You’re not just giving them money; you’re giving them time, growth, and knowledge. In a world of uncertainty, this is a quiet revolution, a blueprint for financial peace that begins before adulthood.

Disclaimer: This list is solely the author’s opinion based on research and publicly available information.

12 Reasons Why Americans Are Working More And Earning Less

Photo Credit: AllaSerebrina/depositphotos

Something’s broken in the American work equation. People are clocking more hours, juggling side gigs, and hustling harder than ever, yet their bank accounts don’t reflect the effort. The promise that hard work equals success is being rewritten in real time. Wages have stagnated, benefits are shrinking, and costs keep climbing. From tech to retail, workers realize they’re running faster on a treadmill going nowhere.

Read it here: 12 Reasons Why Americans Are Working More And Earning Less

The Quiet Financial Crisis Hitting Millennials in Their Forties

As millennials edge into their 40s, many expect financial security to arrive. But instead of stability, a quiet financial crisis is unfolding. They’re caught between aging parents, young children, rising costs, and dreams deferred. The world changed faster than their paychecks, college degrees didn’t guarantee wealth, and the 2008 crash left scars that still sting.

Read it here: The Quiet Financial Crisis Hitting Millennials in Their Forties

13 Reasons Why Some People Need To Feel Their Money To Actually Save It

Photo Credit: stockimagefactory.com/depositphotos

In a world where digital wallets and virtual banking dominate, some people still cling to the tactile comfort of cash. For them, the sound of coins jingling or the crisp feel of a hundred dollar bill offers more control than any budgeting app. While society keeps shifting toward convenience, this group finds discipline in the physicality of money. They trust tangible currency to curb overspending and foster mindful habits.

Read it here: 13 Reasons Why Some People Need To Feel Their Money To Actually Save It

You’ll love these related posts: