Custodial IRAs for kids
Help give the child in your life a head start on retirement savings with a custodial Roth or traditional IRA, also known as a minor IRA.
What is a custodial IRA?
Custodial Roth and traditional IRAs are retirement accounts designed for minors who have earned income. While the account is owned by the child, it must be opened and managed by a custodian—typically a parent, guardian, or grandparent—until the child reaches the age of majority.
These accounts differ from other custodial, nonretirement account options for minors, such as UGMA/UTMA accounts for general investing goals or 529 education savings plans.
Who is eligible for a custodial IRA?
To be eligible, a child must have earned income and a custodian to manage the account until they reach adulthood.
Earned income requirements
Any child who has earned income can contribute to a custodial IRA. This can come from formal employment (like working at a local store) or self-employment (like babysitting or lawn services). Self-employment income needs to be documented.
Custodian requirements
A parent, relative, or guardian must open the account, make investment decisions, and manage the account until the child reaches the age of majority (between ages 18 to 21, depending on the state). At that time, the child can initiate the account transfer process.
Why open a custodial IRA?
Help give the child in your life a more flexible financial future. Trusted by both industry experts and everyday investors, our low-cost, industry-leading products are backed by 50+ years of expertise.
Compounded growth
Give them a head start on retirement savings. By starting early, small contributions can create a big impact over time with compound growth.
Tax-advantaged savings
Set them up for success with a tax strategy that fits their needs. To maximize tax benefits for your situation, you can choose a traditional IRA for tax-deferred growth or a Roth IRA for tax-free growth.*
Flexible withdrawals
Opening a custodial IRA provides the flexibility to use funds for qualified expenses later in life, like buying a house for the first time, while giving them a longer runway to save for retirement.
Early financial confidence
Teaching financial literacy at a young age is key for making smart decisions in the future. Opening and managing an IRA helps children learn investing, saving, and responsibility with real ownership.
Custodial Roth IRA vs. custodial traditional IRA
Most custodial IRAs are Roth IRAs due to the expected lower income for children, but traditional IRAs may be an option in rare cases for children with high annual incomes.
Custodial Roth IRA
- Contributions made after tax
- Tax-free growth and withdrawals*
- Often a strong fit for children due to their lower expected income
Custodial traditional IRA
- Contributions may be tax deductible
- Taxes typically paid at withdrawal for tax-free growth
- May be a fit for children with high annual income as there are no income restrictions
Contribution limits
Contribution limits for a custodial Roth or traditional IRA are tied directly to the child’s earned income.
The annual contribution limit is the lesser of the IRS annual IRA limit—which may change from year to year—or the child’s total income earned for the year.
Frequently asked questions
Can I open a custodial IRA for my child if they have no income?
Yes, you can open a custodial IRA. But to contribute to the account, the child must have earned income from working. The IRS requires that IRA contributions come from compensation for personal services, such as wages from a part-time job, babysitting, lawn mowing, or other work where they receive payment. If the child doesn’t have earned income, you may want to consider other account types designed for saving on their behalf, like UGMA/UTMA or Trump accounts.
Does a custodial IRA affect financial aid?
A custodial IRA generally doesn’t affect financial aid, because retirement accounts aren’t counted on the FAFSA. However, taking money out later can reduce aid, since withdrawals may count as income. It's important to consult with a financial aid advisor to understand how your specific situation may be affected.
Can I use a custodial IRA to pay for college?
While the child can withdraw funds from a custodial IRA to pay for qualified higher education expenses without the 10% early withdrawal penalty, taxes may still apply. Withdrawals from a traditional IRA are taxed as ordinary income. For a Roth IRA, contributions can be withdrawn tax-free and penalty-free at any time, but earnings may be subject to taxes if withdrawn early. Keep in mind that a custodial IRA is designed primarily for retirement savings. If college savings is your main goal, a 529 plan may be more suitable, offering tax-free withdrawals for qualified education expenses.*
Can a custodial account be converted to a Roth IRA?
If you've opened a traditional custodial IRA, you can convert it to a Roth IRA, but conversion rules and tax implications apply. The amount converted is generally taxable as income in the year of conversion. Once the child reaches the age of majority in your state and the account transfers to their control, they'll have full authority over any conversion decisions.
What happens when the child reaches the age of majority?
When the child reaches the age of majority—generally at 18, 19, or 21, depending on your state—they can transfer the custodial IRA into an IRA in their name. At that point, the child gains full control over the account, including all investment decisions and any distribution choices. The account continues to function as a regular IRA with the same tax treatment and rules.
What counts as earned income?
Earned income includes wages, salaries, tips, and other compensation received from self-employment. For children, this can include money earned from part-time jobs, babysitting, lawn mowing, or other work. Investment income, such as interest, dividends, or allowance, does not count as earned income for IRA contribution purposes.
Can money be withdrawn early?
Yes, but early withdrawals from a custodial IRA before age 59½ may be subject to income taxes and a 10% federal penalty tax. However, there are exceptions to the penalty for certain qualified expenses, including first-time home purchases and higher education expenses. With a Roth custodial IRA, contributions (but not earnings) can be withdrawn at any time without taxes or penalties. As the custodian, you manage any distributions until the child reaches adulthood.