Giving your child a massive head start on retirement is possible through a Custodial Roth IRA. But there is one major catch: they must have earned income.
What is a Custodial Roth IRA?
Because minors cannot legally open brokerage accounts on their own, a parent or guardian must open a Custodial IRA on their behalf. The adult manages the account until the child reaches the age of majority (usually 18 or 21, depending on the state), at which point control transfers fully to the child.
The "Earned Income" Rule
This is the most critical rule: Your child can only contribute up to the amount they actually earned during the year.
- If they made $2,000 mowing lawns, the maximum contribution for the year is $2,000.
- If they made $10,000 at a summer job, they can contribute up to the annual limit ($7,500 in 2026).
- Allowance or cash gifts do not count as earned income.
The Parent Matching Strategy
Your teenager might not want to put their hard-earned summer cash away for 50 years. A common strategy is for parents to "match" the child's earnings. For example, the child keeps their $2,000 paycheck, and the parent contributes $2,000 of their own money into the child's Custodial Roth IRA. This is perfectly legal, as long as the contribution doesn't exceed the child's total earned income.
Why it is So Powerful
Thanks to the math of compound interest, putting away small amounts of money as a teenager can turn into millions of tax-free dollars by age 65. Fifty years of untaxed compounding is arguably the greatest financial advantage a person can have.