Custodial IRA for Minors: Earned Income, Rules, and How to Open One
A custodial IRA lets a child with a paying job start retirement savings years before most adults do. An adult opens and runs the account, but the money belongs to the child.
This guide is for parents, grandparents, and guardians of a minor child who earns money from babysitting, lawn care, a summer job, or a family business.
What is a custodial IRA?
A custodial IRA is a traditional or Roth IRA owned by a minor and managed by an adult custodian, typically a parent. Federal law has no special IRA for minors. A custodial Roth IRA works like a standard Roth IRA, and the same IRS contribution and distribution rules apply.
Charles Schwab, for example, says the custodian, typically a parent, controls the custodial IRA until the child reaches 18, or 25 in some states.
Who owns the account
The child is the account owner. Schwab says contributions to its custodial IRA are irrevocable transfers for the benefit of the child, so the money cannot later be moved into the parent’s own IRA.
Retirement savings, not a UTMA
A custodial IRA is a retirement account, not a general custodial account such as a UTMA.
Who can open a custodial IRA
The custodian is usually a parent or legal guardian. IRA providers such as Vanguard also allow a relative.
The child’s earned income requirement
The child must have taxable compensation for the year. A gift, an allowance, or investment income does not count.
What counts as earned income for kids
Publication 590-A counts wages, salaries, tips, and net self-employment income as compensation. Interest, dividends, and other investment earnings do not count.
Babysitting, dog walking, and mowing lawns can count as self-employment income when the work is real and paid at a fair rate.
Keeping records
Keep a simple log of dates, clients, and amounts. Vanguard says that income needs to be documented for a custodial IRA.
The IRS requires a tax return when net self-employment earnings reach $400, according to Publication 501, even if no income taxes are owed.
Is there a minimum age?
The IRS sets no minimum age for an IRA, so a child of any young age with real earned income can qualify. Brokerage policies vary, so check with the investment firm before you apply.
Custodial IRA contribution limits for 2026
The IRS limit for 2026 is $7,500, or the child’s total earned income if less. A teen who earns $3,000 can receive at most $3,000 in IRA contributions for the year.
The contribution can come from a parent, grandparent, or the child’s own money, as long as the total stays within the contribution limits. Custodial Roth IRA contributions and traditional contributions share one limit.
See our IRA contribution limits page for deadlines and excess-contribution fixes. For 2026, contributions are generally due by the April 2027 filing deadline, not including extensions.
Who can contribute to a custodial IRA
Anyone can contribute to a custodial IRA for the child, though it usually gets no employer contributions the way a 401(k) can. Some parents match part of a teen’s paycheck to teach saving money.
Custodial Roth IRA vs. custodial traditional IRA
Families can choose a custodial Roth IRA or a custodial traditional IRA, and the tax implications differ.
Why most families choose a custodial Roth IRA
A Roth IRA is funded with after-tax dollars. Many children have little or no tax liability, so they give up few tax benefits by skipping a deduction.
Roth IRAs have no required minimum distributions during the owner’s lifetime.
When a tax-deferred custodial traditional IRA makes sense
A traditional IRA offers tax-deferred growth, and contributions may be tax deductible. A tax-deductible contribution helps only if the child owes income taxes. Later withdrawals are generally taxed at ordinary income tax rates, and required minimum distributions apply in retirement.
A traditional custodial IRA can later be converted to a Roth IRA, but the converted amount is generally taxable. Our Roth conversion guide explains how.
Tax benefits of a custodial Roth IRA
The tax advantages of a child’s Roth IRA come from time.
Tax-free growth for the child’s future
Money in a child’s custodial Roth IRA can compound for 50 years or more before retirement age. If the account meets the five-year rule and the owner is 59½ or older, the money grows tax-free and comes out tax-free. That long runway is how a small account can build long term wealth, though investments can lose value.
Roth contributions can be withdrawn
Under the Publication 590-B ordering rules, regular Roth IRA contributions come out first and are not taxed. Custodial Roth IRA contributions can be withdrawn tax-free at any time, without the 10% additional tax.
Earnings are different. Earnings withdrawn before the account qualifies, generally at age 59½ and after five years, may be taxable as ordinary income and face the 10% additional tax.
Taking money out of the retirement account
Contributions can be withdrawn, but a retirement account works best when left alone. Any money withdrawn early stops compounding.
Penalty-free withdrawals for education and a first home
Publication 590-B lists exceptions to the 10% additional tax. Two kinds of qualified expenses matter most for young savers:
- Qualified higher education expenses, such as tuition, fees, books, and supplies.
- Up to $10,000 over a lifetime toward a first home.
These exceptions make some withdrawals penalty-free, not tax-free. Our IRA early withdrawal exceptions guide lists every one.
What happens when the child reaches the age of majority
When the child reaches the age of majority set by state law, the custodian must turn the account over. Firms describe different ages: Vanguard says 18 to 21 depending on the state, and Fidelity says 18 to 25. Your state and your firm’s agreement control.
Once the child reaches adulthood, they control the investments and any decision to withdraw money. That handoff can teach financial responsibility, but parents cannot stop a young adult from spending the account.
How to open a custodial IRA
- Confirm the child has earned income this year and keep the records.
- Choose a firm that offers custodial IRAs; our best IRA accounts review compares major providers.
- Provide both Social Security numbers.
- Pick a custodial Roth IRA or custodial traditional IRA.
- Contribute within the contribution limits.
- Choose investments; no particular investment is required.
Our how to open a Roth IRA and how to open an IRA guides cover each step in detail.
Custodial IRA vs. UTMA and Trump accounts
UTMA and UGMA custodial accounts
A UTMA or UGMA custodial account needs no earned income and has no IRA-style contribution cap, but it is a taxable investment account under state law, funded with after-tax dollars. Investment income may be subject to the kiddie tax described in IRS Topic 553. The gift is irrevocable, and the child takes control at the age set by the state.
Trump accounts
Trump accounts are a new type of IRA for children under federal law. The IRS says parents and others can contribute up to $5,000 a year in total, starting July 4, 2026, and an employer can add up to $2,500 of that. Eligible children born from 2025 through 2028 can get a one-time $1,000 federal contribution. From the year the child turns 18, the account is generally treated as a traditional IRA. Vanguard notes these accounts are an option when a child has no earned income for a custodial IRA.
Financial aid
On the FAFSA, the Federal Student Aid office lists retirement plans, including non-education IRAs, as not an investment, while UTMA and UGMA accounts are reported. Fidelity notes that withdrawals can count as income on later financial aid forms.
Downsides of a custodial Roth IRA
- The child needs earned income every year you contribute.
- The money belongs to the child, and the custodian must hand it over at adulthood.
- Early withdrawals of earnings can trigger taxes and a penalty.
Custodial IRA FAQ
Can my 7 year old have a Roth IRA?
Yes, if the child has real earned income from work, such as paid modeling or work in a family business at a fair wage. The IRS has no minimum age for a custodial IRA, but each firm sets its own rules.
Is a UTMA or Roth IRA better for a child?
A Roth IRA for kids has stronger tax benefits but needs earned income. A UTMA is more flexible but lacks those tax advantages. Many families use both for the child’s future.
The bottom line
A custodial IRA turns a child’s income into decades of tax-free growth and early lessons in financial literacy that support later financial success. Confirm the earned income, choose a custodial Roth IRA in most cases, and plan for the handoff when the child reaches adulthood. Married and saving for a stay-at-home spouse instead? See our spousal IRA guide, or compare every option in types of IRA accounts.
Written by Tim Schmidt and reviewed for tax and account accuracy by Sean Webster, CPA. Last reviewed November 10, 2026 (America/New_York). This guide is for general education. It is not tax, legal, or investment advice. IRAInvesting.com is not a custodian, broker-dealer, or investment adviser. Custodial account rules and the age of majority depend on state law and each firm’s account agreement. Tax laws change and can materially impact investment results, and state and local taxes may also apply. Before you act, talk with a licensed tax professional who can review your tax position. Investing involves risk, including the possible loss of principal.