Guest Post: Should You Open a Custodial Roth IRA For Your Child?

The pros, cons, and what parents should know before getting started.

If you’re anything like me, there’s a moment where it suddenly hits you: Oh wow, we’re responsible for helping them make smart money choices. Not just saving for college or covering the next sports fee, but teaching them how money works long-term.

For some parents, that realization may come when a teenager starts earning money. For others, it may come much earlier.

One financial tool you may consider is a Custodial Roth IRA.

At first glance, it can sound a little…intense. A retirement account for a kid? When they still need reminders to put their shoes away? Totally fair reaction. But the reason so many parents are curious about Custodial Roth IRAs is simple: time. When you start investing for your child early—even if it’s just small amounts—they have decades for that money to grow.

That said, a Custodial Roth IRA isn’t a magic solution or a must-do for every family. There are some really compelling benefits, but there are also trade-offs that parents should understand before jumping in.

What Is a Custodial Roth IRA?

At its core, a Custodial Roth IRA is just a retirement account for a child who earns money—but with a grown-up managing it (that’s the “custodial” part).

Because kids under 18 (or 21, depending on your state) can’t legally open and manage their own investment accounts, a parent or guardian steps in as the custodian. You’re the one opening the account, choosing the investments, and keeping things on track—for now. The account itself, though, is in your child’s name, and eventually, it becomes fully theirs.

The big requirement to know upfront? Your child must have earned income. That means money from an actual job—like working at a coffee shop, lifeguarding, babysitting, tutoring, or even certain types of self-employment. Birthday money, allowance, and chore payments don’t count here, which surprises a lot of parents at first.

What makes a Custodial Roth IRA especially appealing is how it’s funded. Contributions are made with after-tax dollars, but once the money is in the account, it can grow tax-free. And if your child follows the rules, they’ll be able to withdraw that money tax-free in retirement.

One important thing to understand is that this isn’t a savings account you can dip into whenever you want. While there’s some flexibility, the purpose of a Custodial Roth IRA is long-term growth.

Eventually—usually when your child turns 18 or 21—the custodial part ends, and full control of the account transfers to them. At that point, the money is theirs to manage.

How a Custodial Roth IRA Works

First things first: your child needs earned income. This is the non-negotiable part. If they’re working a summer job, babysitting regularly, lifeguarding, tutoring, or earning money through legitimate self-employment, they’re likely eligible. The key is that the income has to be real and trackable—something you could reasonably document if needed. Allowances and gift money don’t count, even if it feels like hard-earned cash to them.

Once earned income is in the picture, you (as the parent or guardian) can open the Custodial Roth IRA on their behalf. You’re the one managing the account for now—choosing investments, setting contribution amounts, and keeping an eye on things—but the account is officially in your child’s name.

When it comes to contributions, there’s a cap each year. Your child can contribute up to the lesser of:

• Their total earned income for the year, or 
• The annual Roth IRA contribution limit set by the IRS.

So if your teen earns $2,500 during the summer, they can contribute up to $2,500—no more, no less. That said, the money going into the account doesn’t technically have to come from your child’s paycheck. Many parents choose to let their child save their earnings for short-term goals and then “match” those earnings by funding the Roth IRA themselves.

Next comes the investing part, which is where a lot of parents feel nervous. Custodial Roth IRAs can hold investments like index funds, ETFs, mutual funds, or target-date funds. Many families keep it simple and focus on long-term growth, especially since time is the biggest advantage kids have on their side.

Finally, it’s important to understand the long game. A Custodial Roth IRA is designed for retirement—way down the road. While contributions can be withdrawn later if needed, earnings are meant to stay invested so they can grow tax-free over decades. And eventually, when your child reaches adulthood, control of the account officially transfers to them.

Pros Of a Custodial Roth IRA

Let’s start with the upside, because there are some really compelling reasons parents get excited about Custodial Roth IRAs. While this account definitely isn’t for everyone, when it does make sense, it can feel like one of those “why didn’t I know about this sooner?” moments.

• Tax-Free Growth Over Decades: The money your child contributes goes in after taxes, but once it’s invested, it grows tax-free. And when they eventually withdraw it in retirement? Still tax-free.
• Contributions Can Be Accessed Later If Needed: Unlike many other retirement accounts, Roth IRAs allow you to withdraw contributions (not earnings) without penalties or taxes. That flexibility can feel reassuring as a parent. While the goal is to let the money grow long-term, it’s nice knowing the contributions aren’t completely locked away forever. 
• Works Well Alongside Other Savings Goals: A Custodial Roth IRA doesn’t have to replace other savings tools—it can simply complement them. Many parents pair it with a 529 plan, a savings account, or even a small allowance budget. It’s just one piece of a bigger financial picture, and for families already thinking ahead, it can fit in nicely. 
• A Built-In Financial Responsibility Lesson: Opening a Custodial Roth IRA creates natural opportunities to talk about money in a healthy, age-appropriate way. Kids can see how their earnings turn into investments, how markets go up and down, and how patience plays a role in long-term growth.

Cons Of a Custodial Roth IRA

As great as Custodial Roth IRAs can be, this is where it’s important to slow down and look at the full picture. There are a few downsides that don’t always get talked about upfront—and depending on your family, they might be deal-breakers or simply things to plan around.

• Earned Income Is Required: Your child must have earned income, and it needs to be real, documented income. For teens with steady jobs, this isn’t a big issue. But for younger kids or families hoping to start saving before formal employment, it can make a Custodial Roth IRA feel out of reach. 
• The Money Becomes Fully Theirs One Day: When your child reaches the age of majority, the account officially becomes theirs—no parental oversight, no take-backs. For some parents, that’s empowering. For others, it’s mildly terrifying. If the idea of your teenager having full control over the account makes you uneasy, it’s something to think through before opening one.  
• Contribution Limits Are Relatively Low: Even if your child earns a decent amount, Roth IRA contribution limits cap how much you can put in each year. While the long-term growth can be powerful, this isn’t a place to stash large sums of money quickly. 
• It’s Not Designed For Short-Term Goals: A Custodial Roth IRA is a long-term play. If your primary goal is saving for college, a first car, or early adulthood expenses, this may not be the best tool. 
• Financial Aid Timing Can Get Tricky: While retirement accounts are generally excluded from FAFSA asset calculations, withdrawals can sometimes count as income. That doesn’t make a Custodial Roth IRA “bad” for financial aid—it just means timing matters.

Custodial Roth IRA vs. Other Savings Options

One of the most confusing parts of planning for your kids’ financial future is that there are so many different accounts—and they all sound kind of similar until you really dig in.

You don’t have to choose just one forever. Most families end up using a combination of savings tools, depending on their goals. Here’s a simple way to think through how a Custodial Roth IRA compares to some of the most common alternatives.

Custodial Roth IRA vs. a 529 College Savings Plan

A 529 plan is specifically designed for education. The money grows tax-free as long as it’s used for qualified education expenses, like tuition, books, and certain room-and-board costs. If college (or trade school) is your top priority, a 529 often makes sense.

A Custodial Roth IRA, on the other hand, isn’t tied to education at all. It’s meant for retirement—but with some flexibility. Contributions can be accessed later if needed, and there are no penalties for qualified retirement withdrawals down the line.

Custodial Roth IRA vs. UGMA Accounts

Compared to a Custodial Roth IRA, UGMA accounts are more flexible when it comes to contributions. There’s no earned income requirement, which makes them a great savings tool for parents with younger kids.

Similar to a Custodial Roth IRA, the child gains full control over the account once they reach adulthood. The trade-off, though, is that these accounts don’t offer the same tax advantages. Investment earnings can be taxed each year.

If your goal is flexibility and you don’t mind potential tax implications, a UGMA account works well. If long-term, tax-free growth is the priority, the Custodial Roth IRA tends to win.

Custodial Roth IRA vs. High-Yield Savings Accounts

Savings accounts are simple, predictable, and low-stress, which is why so many parents love them. They’re great for short-term savings goals or teaching younger kids basic savings habits.

That said, savings accounts aren’t built for long-term growth. A Custodial Roth IRA is better suited for long-term goals, while savings accounts shine when you want easy access and zero risk.

There’s no single “right” way to save for your kids. A Custodial Roth IRA isn’t a requirement, a must-do, or a parenting gold star. It’s just one option in a much bigger toolbox.

For some families, it’s a powerful way to take advantage of time, tax-free growth, and early financial education. For others, it might make more sense to focus on other investment tools.

If you decide a Custodial Roth IRA is a good fit for your family, use the account to talk about goals, responsibilities, and the idea that not all money is meant to be spent right away. And if you decide a Custodial Roth IRA isn’t the right fit right now, that’s okay, too. Financial planning is all about meeting your family where you are and making choices that support both today and tomorrow.

Disclosure: This is a sponsored guest post. Contents have been provided by the sponsor.