What Is a Roth IRA for Kids?

November 19, 2024

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Saving for retirement isn’t something your kid needs to age into. If your child is earning an income, they can start building their retirement fund with an IRA.

What types of IRAs can you open for kids?

Traditional and Roth IRAs are the two main types of retirement accounts you can open for a child. Keep in mind that there are important differences between a Traditional and Roth account, which you can learn more about here. But generally speaking:

With a Roth IRA, your contributions are made with after-tax dollars, but your withdrawals in retirement are tax-free as long as certain conditions are met.
With a Traditional IRA, your contributions grow tax-deferred until withdrawn in retirement.

While both types of IRA may be an option for your child, in this article, we will focus on Roth IRAs.

What is a Roth IRA for kids?

There’s really no such thing as a “Kids Roth IRA” account – it’s simply a regular Roth IRA that parents can establish for their child.

Here’s how it works in a nutshell: Money is added to the account with post-tax income that your child has earned, that money grows over time, and then your child gets to withdraw the money tax-free in retirement once certain conditions are met. But be aware that there are certain account contribution and withdrawal rules you’ll need to follow.

Let’s go over a few important ones below.

Potential tax-free withdrawals with a Roth IRA

If your child wants to enjoy tax-free withdrawals, they will have to hold the account for at least five years and wait until they turn 59 ½ before tapping into their money. Since we’re talking about opening a Roth IRA for a child, the five years should be a lock.

Good to know: Keep in mind that contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time. However, withdrawals of earnings prior to the age of 59 ½ (or before the account is 5 years old) are generally subject to income tax unless it’s a qualified distribution and to a 10% early withdrawal penalty unless you qualify for an exception.

That being said, contribution and withdrawal rules for Roth IRAs are always subject to change, so it’s a good idea to talk to a financial advisor or tax professional if you have questions. You can also visit the IRS website for the most up-to-date information.

What are the other key rules of a Roth IRA for kids?

Your child must have earned income. Money that goes into your kids’ Roth IRA has to be income your child has earned, defined by the IRS as taxable income and wages. That means birthday checks don’t count. However, money from babysitting, dog walking, or jobs that come with a W-2 (restaurant gigs for instance) are considered earned income. Since many childhood jobs do not come with a W-2, it’s important to keep a record of the type of work, how much they earned, and when they earned it.
There is no age limit. Your child can contribute at any age, as long as they have earned income that do not exceed Roth IRA income thresholds. Visit the IRS webpage for more information.
Contribution limits apply. Roth IRAs are subject to annual contribution limits. For 2024 and 2025, the standard maximum annual contribution limit is $7,000. But remember: You can only contribute as much as you’ve earned in a given year. If the amount your child earned for the year was $2,000, that’s the most they could contribute.

How do you open a Roth IRA for kids?

You may see some accounts marketed as a "Roth IRA for Kids" but what you’re really setting up is called a custodial account. The adult – parent or guardian – would be in control of the Roth IRA until the child is legally considered an adult, which is typically 18 or 21, depending on your state. Once your child is considered a legal adult, the assets in the account must be transferred to a new account under your child’s name.

If you have any questions about opening a Roth account for your child, don’t hesitate to speak with a financial advisor.

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This article is for informational purposes only and is not a substitute for individualized professional tax advice. Individuals should consult their own tax advisor for matters specific to their own taxes. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA and Goldman Sachs & Co. LLC are not providing any financial, economic, legal, accounting, tax or other recommendations in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates. Neither Goldman Sachs Bank USA, Goldman Sachs & Co. LLC nor any of their affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements of any information contained in this document and any liability therefore is expressly disclaimed.