Reviewed September 2026.
A custodial Roth IRA is a Roth individual retirement account owned by a minor, managed by an adult custodian, and funded only up to the teen’s earned income (or the annual IRA limit, whichever is lower). The tax shape matches an adult Roth: contributions are after-tax, contribution basis can generally be withdrawn later without tax or penalty, and earnings can be tax-free if rules are met. Product comparison for adults: Roth IRA vs 401(k) starter. Tax contrast: Roth vs traditional IRA taxes.
Earned income is the gate
| Rule | Practical meaning |
|---|---|
| Earned income required | W-2 wages or net self-employment earnings from a real job (babysitting, lifeguarding, retail) after business expenses and the deductible portion of self-employment tax. A 1099 gross amount is not the contribution ceiling. Allowance for chores from parents is usually not earned income. |
| Contribution cap | Lesser of earned income for the year or the IRS IRA limit (for 2025 the under-50 IRA limit was $7,000; confirm the current-year figure on IRS.gov). |
| Who can deposit cash | Parents may gift cash that the teen then contributes, but the teen still needs enough earned income to support the contribution amount. |
| Age | No minimum age in federal IRA rules if earned income exists; custodianship follows brokerage/state rules until majority. |
Example: Maya, 16, earns $3,200 from a summer job at Target. She may contribute up to $3,200 for that tax year (not the full $7,000 IRA cap). Her dad can give her $3,200 cash so she can keep her paycheck for school clothes; the contribution is still limited by her $3,200 wages.
Custodian control vs UGMA/529
| Feature | Custodial Roth IRA | UGMA/UTMA | 529 |
|---|---|---|---|
| Purpose | Retirement wrapper (with Roth withdrawal rules) | General minor assets | Education savings |
| Contribution basis | Earned income limit | No account contribution cap; annual gift-tax exclusion/reporting rules may apply to large gifts | Contributor funded; no earned-income rule |
| Control at majority | Teen typically takes over the Roth | Assets transfer to the child (UGMA/UTMA) | Account owner usually stays the parent |
| Investment choice | Brokerage IRA menu (Fidelity, Schwab, Vanguard, etc.) | Brokerage/bank custodial | 529 plan menu |
A taxable custodial brokerage commonly uses the same UGMA/UTMA registration as the middle column (not a separate fourth account type); details: When to use a custodial brokerage. College-only goals often still start with a 529.
Why families use it
- Long compounding runway if the teen leaves contributions invested (Investing basics).
- Teaches earned-income → invest habit with a named account.
- Roth contribution basis can generally be withdrawn later without tax/penalty (earnings still have rules; five-year and age tests apply to earnings).
Setup checklist
- Confirm earned income documents (pay stubs, W-2, or Schedule C style records for self-employment).
- Open a custodial Roth IRA at a low-cost broker; name the adult custodian and the minor.
- Contribute min(qualifying earned income, annual IRA limit) before the tax-year deadline (W-2 wages, or net self-employment earnings after applicable adjustments, not 1099 gross). Prior-year contributions often close mid-April of the following year; confirm IRS dates.
- Invest in a simple stock index fund or age-appropriate allocation; avoid speculative single names as the default.
- Keep a folder: W-2, contribution confirmation, beneficiary form when the custodian allows updates.
- At majority, complete the broker’s transition so the now-adult owns the Roth outright.
Common mistakes
- Contributing more than wages (excess contribution penalties can apply).
- Treating parental gifts as “income” without a real job.
- Raiding the Roth for nonessential teen spending when a taxable custodial or cash savings fit better.
- Ignoring state UGMA/UTMA age rules when comparing tools.
Educational only. Not tax or investment advice. IRA limits, earned-income definitions, and Roth qualification rules change; verify current IRS Publications 590-A/590-B and your broker’s custodial IRA agreement.