Range - Your Child Earned Money This Year? Consider a Roth IRA

Key Takeaways

A child with legitimate earned income (W-2 or self-employment, like babysitting or lawn care) can contribute to a Roth IRA
Parents or grandparents can fund the contribution, letting the child keep the cash they actually earned
The contribution is capped at the lesser of the child's earned income or the annual IRA limit
Good recordkeeping matters most for informal income with no W-2 or 1099
A minor's Roth IRA is held as a custodial account until they reach the age of majority
Decades of potential compounding, not the size of the initial contribution, is the real advantage of starting early

When we think about Roth IRAs, we typically think about retirement planning for ourselves. But one of the most powerful uses of a Roth IRA can actually start much earlier, when a child begins earning money.

If your child has legitimate earned income, they may be eligible to contribute to a Roth IRA. And while the child needs to have earned income to establish eligibility, the money used to fund the Roth IRA does not necessarily have to come directly from the child's pocket.

That creates an interesting planning opportunity for parents and grandparents: help a child start investing early, while allowing them to keep and use the cash they worked hard to earn.

There are a few things to consider to make the most of this tax-advantaged investing tool:

The basic rule: earned income creates Roth IRA eligibility

The first requirement is simple: your child must have earned income.

That could come from a traditional job reported on a W-2, but it doesn't necessarily require a conventional employer. Depending on the circumstances, legitimate self-employment income can count as well, based on net earnings after any expenses.

Examples might include:

Summer or part-time employment
Babysitting
Lawn care
Tutoring
Other legitimate services performed for compensation

What generally doesn't count is money that wasn't earned through work, such as an allowance, gifts from family members, or investment income.

The amount a child can contribute is generally limited to the lesser of their eligible earned income or the annual IRA contribution limit for that year.

For example, if a child earns $3,000 during the year, they generally can't contribute $7,500 to a Roth IRA simply because a parent is willing to provide the money. Their earned income establishes the contribution ceiling.

Here's where it gets interesting: parents can provide the money

This is one of the most useful features of the strategy.

Suppose your child earns $3,000 during the year. They may be eligible to contribute up to $3,000 to a Roth IRA, assuming they have no other IRA contributions and the applicable annual IRA limit is higher.

You can give them the $3,000 to make the contribution.

The IRS doesn't require the exact dollars earned from the job to be the dollars deposited into the Roth IRA. What matters is that the child has sufficient eligible earned income to support the contribution.

That means a parent could effectively say:

"You earned $3,000 this summer. We'll fund $3,000 of your Roth IRA, and you can keep your $3,000 of earnings."

The child gets the Roth contribution and keeps their earned money for spending or saving elsewhere.

You can think of this as a parent "matching" or subsidizing the child's retirement contribution, but the child's earned income still determines how much can go into the Roth.

Documentation matters

For a child with a conventional job, documentation is relatively straightforward. A W-2 from the employer provides evidence of the child's wages.

Things can become less obvious when the child earns money through informal work.

If your child babysits for several families, for example, there may not be a W-2 or 1099 documenting every payment. In that case, parents should maintain good records of the income.

A simple record could include:

Date of the work
Amount earned (and any related expenses)
Description of the work
Who paid the child

The goal is to have a reasonable contemporaneous record supporting the child's earned income.

This becomes particularly important because the Roth IRA contribution limit is tied to that income.

What about taxes?

Having earned income doesn't necessarily mean a child will owe federal income tax.

Children with relatively modest earnings may owe little or no federal income tax because of the standard deduction and other applicable rules. However, income tax and payroll or self-employment taxes are separate issues, and the tax treatment can vary depending on how the income was earned.

Whether a child is required to file a tax return also depends on the type and amount of income.

If you're using this strategy, don't assume that being a minor means there are no tax filing obligations. It's worth confirming the requirements with a tax professional, particularly if the child is self-employed.

A minor's Roth IRA is typically custodial

A child generally can't open and control a regular IRA in the same way an adult can.

Instead, a parent or another eligible adult can establish a custodial Roth IRA for the child. The account is held for the child's benefit, and the child ultimately takes control of the account when they reach the applicable age under state law and the account's terms.

The important point is that the Roth IRA belongs to the child, not the parent.

Why start so early?

This is where the strategy becomes especially compelling.

Consider a hypothetical $3,000 Roth IRA contribution made when a child is 14. If that money were invested and earned an average annual return of 8%, it could grow to roughly $152,000 by age 65, without any additional contributions.

That's not a prediction or guarantee. Markets don't deliver a fixed 8% return. This simply illustrates the extraordinary impact of time.

The child doesn't need to save a huge amount of money at 14. The real advantage is giving the investment five decades to compound.

And because it's a Roth IRA, qualified withdrawals in retirement can generally be tax-free.

The bigger benefit may not be financial

The dollar value of the account is only part of the story.

A custodial Roth IRA can be an opportunity to teach a child how money works:

"This is what earned income means."
"This is how taxes work."
"Here's what a retirement account is."
"Here's how investments grow."
"Here's why starting early matters."
"Here's why we save some of what we earn."

A child who learns these concepts at 14 or 16 may enter adulthood already familiar with the basic mechanics of saving and investing.

That's potentially more valuable than the initial contribution itself.

A simple framework for parents

If you're considering this strategy, the process can be boiled down to five steps:

Confirm the child has legitimate earned income.
Document the income. Keep W-2s, 1099s, or records of informal or self-employment income.
Determine the child's eligible Roth IRA contribution amount. Generally, this is limited by both earned income and the annual IRA contribution limit.
Establish a custodial Roth IRA.
Fund and invest the account. The parents can provide some or all of the cash used for the contribution, provided the contribution is otherwise eligible.

One final thought

A Roth IRA for a child isn't about trying to turn a teenager into a retirement planner.

It's about recognizing that time is one of the most valuable assets an investor has.

If your child is already earning money, you may have an opportunity to put some of that early income to work for decades. And if parents or grandparents are willing to fund the contribution, the child can potentially build a meaningful long-term investment account without sacrificing the cash they've earned.

The earlier the money gets invested, the longer it has to compound.

For families with children who have earned income, a custodial Roth IRA can be a remarkably powerful and educational financial planning tool.

Blog

Your Child Earned Money This Year? Consider a Roth IRA

If your child has legitimate earned income from a summer job, babysitting, lawn care, or other work, they may be eligible to contribute to a Roth IRA.