Retirement accounts
Roth IRA for Kids: The Earned Income Rule, and What a 17-Year Head Start Is Worth
A Roth IRA for kids hinges on one thing: earned income. What counts, who controls the account, how financial aid treats it, and the arithmetic of starting at 8.
Yes, a child can have a Roth IRA. It is opened as a custodial Roth IRA: the account is in the child's name, a parent or guardian acts as custodian, and the one hard requirement is that the child had earned income during the year.
There is no minimum age anywhere in the tax code. A six-year-old with $800 of modeling income qualifies. A sixteen-year-old with a $50 weekly allowance does not. The dividing line is earned income, and everything else about a Roth IRA for kids sits downstream of it.
The earned income requirement, and what counts
Earned income means compensation for work performed: wages, salary, tips, and net self-employment earnings. It does not mean money that simply arrived.
| Counts as earned income | Does not count |
|---|---|
| W-2 wages from any employer | Allowance |
| Tips | Gifts from family |
| Babysitting, yard work, dog walking | Chores paid by a parent |
| Real work in a family business, at a real wage | Interest, dividends, capital gains |
| Acting, modeling, refereeing | Money sitting in a UTMA or 529 |
The family-business line is where families get into trouble. Paying a twelve-year-old $14,000 to "help around the office" is not compensation; paying a twelve-year-old a defensible hourly rate for filing, shredding, or shooting product photos generally is. The test is whether the work was real and the wage was reasonable for it.
Does the money going in have to be the child's own dollars?
No. The contribution has to be backed by earned income, not funded from it. If a fourteen-year-old earns $2,400 lifeguarding and spends every cent on a bike, a parent or grandparent can still put up to $2,400 into the Roth on their behalf. The IRS cares about the earned income figure on the child's side of the ledger, not the origin of the cash.
How much can go in?
The lesser of the child's earned income and the annual IRA contribution limit, which is $7,500 for the 2026 tax year. That "lesser of" is the entire rule, and it produces a kinked line. The limit belongs to the child as a taxpayer, not to the account, so opening a second Roth IRA does not create a second limit.
For almost every child, the IRS limit is irrelevant. A teenager who earns $3,200 over a summer can contribute at most $3,200. The ceiling that actually binds is the paycheck, not the statute.
What paperwork does this create?
If the child is a W-2 employee, the W-2 is the record. If the work is self-employment (babysitting, mowing, tutoring), the record is whatever the family keeps: dates, hours, who paid, how much. Net self-employment earnings of $400 or more trigger self-employment tax and a filing requirement. Below the standard deduction, a child's earned income generally carries no federal income tax at all, which is what changes the arithmetic of an after-tax wrapper at that age: the deduction a pre-tax account would hand back is worth roughly nothing to someone who owes roughly nothing.
What a 17-year head start is actually worth
Hold the dollars constant and vary only the start date. Two children each receive ten contributions of $2,000, so $20,000 goes into each account. The first contributes from age 8 to 17, then stops forever. The second contributes the identical $20,000 from age 25 to 34. Both are measured at 65, both at an assumed 7% nominal annual return.
The early account reaches about $664,000. The late account reaches about $210,000. The gap is roughly $454,000, and none of it came from contributing more.
The multiple is not an estimate. Every dollar in the early account compounds for exactly 17 more years, so the ratio is 1.07 raised to the 17th power, which is 3.16. Change the return assumption and the ratio changes with it, but the structure does not: the entire advantage is time, and time is the one input a custodial account can buy that an adult account cannot.
The first ten years do more work than the next twenty
Push the schedule further. Suppose the $2,000 keeps going for thirty straight years, ages 8 through 37. Which of those years actually built the balance?
The bars fall because each later dollar has fewer years to work. The $2,000 contributed at age 8 compounds for 56 years and arrives at 65 as $88,414. The $2,000 contributed at age 37 compounds for 27 years and arrives as $12,428. Same deposit, seven times the outcome. Fifty-six years is also fifty-six years of whatever the fund charges, and the cost layers that never show up on a statement compound against the balance on exactly the same schedule.
Stack the blocks and the asymmetry is stark. Ages 8 through 17 put in $20,000 and deliver about $664,000. Ages 18 through 37 put in $40,000 and deliver about $509,000. Twice the money, less result.
Who controls the account, and when that ends
The custodian, usually a parent, makes the investment decisions and handles the contributions while the child is a minor. No employer menu constrains that choice the way one constrains a 401(k), so the field is every fund on the market, an S&P 500 index fund and its expense ratio included. The assets belong to the child from day one. The custodian is a caretaker, not an owner, and cannot use the money for their own purposes.
Control transfers at the age of majority, which is set by state law and by the brokerage's own account terms. In practice this is 18 in most states, 19 or 21 in a handful. On that date the account converts into an ordinary Roth IRA in the child's name and the former custodian has no standing in it at all.
Mechanically, this means the balance becomes fully withdrawable by an adult who did not choose to save it. Nothing in the Roth structure compels the money to stay invested. That is a genuine property of the wrapper, not a footnote. The compounding shown in the charts above assumes no withdrawals, and the person who controls that assumption changes hands on the day the account transfers.
What it does to financial aid
Retirement accounts are not reported as assets on the FAFSA. A Roth IRA balance, whether the student's or the parent's, does not appear in the asset section at all. A UTMA account or a savings account in the child's name does appear, and student-owned assets are assessed at 20%, against a maximum of 5.64% for the same dollars held by a parent. A parent-owned 529 falls in that second group, and whatever is left in it once the tuition bills stop can, subject to conditions, be moved into the child's Roth IRA under SECURE 2.0.
The exposure sits on the income side instead. The FAFSA pulls income from the federal tax return for the relevant base year. A withdrawal of Roth contributions is not taxable and therefore does not land in adjusted gross income. A withdrawal of earnings generally is taxable and therefore does. The balance is invisible; a taxable distribution taken during a base year is not.
The job itself also shows up, since wages are student income, but the formula shields a portion of student earnings (the income protection allowance) before assessing the remainder at 50%.
Contributions come out. Earnings mostly do not.
Roth IRA contributions can be withdrawn at any time, at any age, tax-free and penalty-free. They went in after tax, so there is nothing left to tax. The IRS ordering rules pull contributions out first, which means the first dollars out of the account are always the safe ones. A teenager's $6,000 of accumulated contributions stays $6,000 of basis, standing ahead of every dollar of earnings in the queue — up to whatever the account is actually worth on the day.
Earnings are the other half, and they follow a stricter test. A withdrawal of earnings is tax-free only if the distribution is qualified, which takes two conditions at once: the five-year clock has run and the account holder is at least 59½, disabled, or using up to $10,000 lifetime toward a first home, which is the first-time homebuyer exception an IRA has and a 401(k) does not. Miss either condition and the earnings are ordinary income plus a 10% additional tax. A separate list of exceptions (qualified higher-education expenses among them) waives the 10% but leaves the income tax standing, which is the distinction people most often get backwards.
That clock is worth its own line. It starts on January 1 of the tax year of the first contribution and it does not restart. An account opened for an eight-year-old satisfied the five-year rule decades before the child could plausibly want the money.
The short version
The gate is earned income, and the contribution is capped at the lesser of that income and the annual IRA limit. A custodian runs the account until the age of majority, then it belongs to the child outright, withdrawals included. The balance stays off the FAFSA asset line and contributions stay accessible the whole way through.
What the structure actually buys is years. The arithmetic above is what years are worth: $20,000 contributed between ages 8 and 17 finishes ahead of $40,000 contributed over the following two decades, on the same assumptions, in the same account.