Consultant

Benefits of Starting an IRA for Your Child

April 28, 2025

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Opening an individual retirement account (IRA) for your child can improve their long-term financial prospects a lot by providing them with decades of tax-advantaged compound earnings. Because there are no age limits on opening and contributing to an IRA, one can be opened for your minor child, as long as they have what the IRS calls taxable compensation. An IRA owner can’t contribute more to their account than their taxable compensation for that year. We’ll take a look at all the nuances of opening this type of account for your child to see if it is the right option for your financial situation.

Key Takeaways

Opening an IRA for your child can set them up for substantial wealth accumulation over time.
An IRA can be opened for a child as long as they have earned income.
The IRA for your child must be opened in a custodial account.

IRA Options for Children

There are two main types of IRAs that can be opened for a child: a traditional IRA and a Roth IRA, each offering specific tax advantages. Brokerages customarily require an adult such as a parent or guardian to open an account as a custodial IRA for a minor, managing it until the child reaches legal age.

Roth IRA

A Roth IRA is a type of retirement account in which contributions are made using after-tax income. That allows invested money to grow tax-free and be withdrawn tax-free during retirement if certain rules are followed. Opening a Roth IRA for your child can be especially beneficial because it gives their investments more time to grow, thereby maximizing the compounding of interest over time. Since children typically earn a low income and fall into lower tax brackets, paying taxes on contributions now means they may avoid higher taxes later.

Additionally, Roth IRAs offer flexibility for your child, should they need to use the money prior to retirement. Contributions can be withdrawn at any time without tax or penalty. Earnings can be withdrawn free of tax and penalty once the account owner reaches at least age 59½ and has owned this or another Roth IRA for five years or more. In addition, early withdrawal penalties apply to Roth IRAs unless the account owner qualifies for certain exemptions, such as paying for college or buying their first home.

Traditional IRA

A traditional IRA is a retirement account to which contributions are typically made using pre-tax dollars, and earnings grow tax-deferred until they’re withdrawn during retirement. For a minor child, the upfront tax deduction may not mean much since most children have little or no income and are in a low tax bracket. The primary benefit is allowing earnings to grow tax-deferred. A traditional IRA can be a good option if the goal is to delay taxes until later, especially if you expect that your child will be in a lower tax bracket when they begin withdrawals in retirement.

Unlike the Roth IRA, contributions cannot be withdrawn at any time without penalty before age 59½. However, a traditional IRA also allows for qualified withdrawals prior to retirement in certain circumstances.

Best Custodial Account for IRAs

Company	Account Minimum	Fees or Commission	Available Account Types
Charles Schwab Best Overall	$0	$0 for stock/ETF trades, $0.65 per contract for options	UGMA and UTMA (in states that allow them)
Fidelity Best for Low Fees	$0	$0 for stock/ETF trades, $0 plus $0.65/contract for options trades	UGMA and UTMA (in states that allow them)
Acorns Best Robo-Advisor	$0	Bronze: $3/month, Silver: $6/month, Gold: $12/month	UGMA and UTMA (in states that allow them)

Advantages and Disadvantages of an IRA for Your Child

There are several advantages to opening an IRA for your minor child. For one, your child can reap the benefits of the compounding earnings over time. For another, earnings grow without being taxed year by year. Traditional IRAs offer tax deductions on contributions for the year you make them. Roth IRAs offer tax-free withdrawals when done properly. An IRA is also a great way to teach your child about the importance of saving and investing. However, there are some drawbacks to consider. There are limits on investing in this type of account based on the child’s earned income, and there can be penalties for early withdrawal if your child ends up needing these funds before retirement.

Advantages

Tax-free growth in a Roth IRA: Because your minor child is most likely in a low tax bracket already, the compounding of tax-free growth for several decades can enable the account to grow large by the time your child is ready for retirement, and they won’t have to pay tax on the withdrawals.
Tax-deferred growth in a traditional IRA: If your primary goal is to offset tax on your minor child’s earned income, a traditional IRA can be advantageous because of the upfront tax break you get for investing in a traditional IRA. The money invested in this type of account will grow tax-deferred until withdrawn during retirement.
Early start, more compounding: Starting this account in a child’s early years gives the account more time to compound and grow. That can significantly increase the value of the account over time. Opening an IRA for your child adds decades of growth potential, turning even small, early contributions into a substantial retirement nest egg by the time they’re older.
Teaching your child: Opening an IRA for your child helps them understand the importance of saving and how investing can grow their money over time. It’s a tangible way to introduce financial responsibility early by teaching them smart money habits that can be implemented throughout life.

Qualified withdrawals avoid penalties: One advantage of opening an IRA for your child is the ability to make early, penalty-free withdrawals for certain qualified expenses, such as college costs or buying a first home.

Disadvantages

Limited contributions: IRA contributions can only be made based on earned income. Because minor children typically don’t have much income, the amount that you can contribute to their IRA may be limited.
Minimal tax advantages: The tax benefit for opening a traditional IRA is small. Since minor children have relatively low income, the upfront tax break of a tax deduction on contributions is small because they are in a low tax bracket.
Penalties for early withdrawal: If your child ends up needing the money in their IRA before age 59½ and it is not being used for an IRS-recognized exemption, you’ll be hit with a 10% early withdrawal penalty plus taxes on the early withdrawal. Contributions to a Roth can be withdrawn at any time free of tax and penalty, but earnings will be taxed and penalized if they are withdrawn before you reach at least age 59½ and before having owned a Roth IRA for at least five years, unless you qualify for an exemption. All early withdrawals from a traditional IRA will be taxed and penalized if not withdrawn for a qualified reason.

Steps to Opening an IRA for Your Child

Opening an IRA for your minor child is a simple process that can set them up for long-term financial security. It starts with confirming that your child has earned income, which is required to contribute to an IRA. From there, you’ll choose the type of IRA and open a custodial IRA through a trusted financial institution. Once the account is set up, you can begin making contributions and selecting investments that align with long-term growth goals.

Make sure your child has earned income. Your child must have income from a W-2 part-time job or from other work, such as babysitting, in order to qualify to contribute to an IRA. The maximum contribution to a traditional or Roth IRA for 2025 is $7,000 for anyone younger than age 50. However, your child’s contribution cannot exceed their compensation for that year. For example, if your child has $2,000 of earned income, the most that they can invest in an IRA for that year is $2,000.
Choose the type of IRA. You must decide whether you want to open a Roth IRA and gain the benefit of tax-free growth in the account, or open a traditional IRA, giving your child the upfront tax deduction on the invested amount as well as tax-deferred growth of earnings until withdrawal.
Select a financial institution and open a custodial IRA account. Choose a financial institution, such as a bank, brokerage, or online investment platform. Be sure to do your research because fees can vary from one financial institution to another, and because financial firms may offer different investment options. Once you select a custodian, open a custodial IRA in your child’s name with you as the account custodian until they reach the legal age of ownership.

Fund and manage the account. Contribute up to your child’s earned income or a maximum contribution amount of $7,000 this year and help choose a diversified mix of investments to grow the account over time.

The Bottom Line

Opening an IRA for your child is one of the best things you can do for them financially to give them a head start on building long-term wealth. With decades of potential compound growth, tax advantages, and the flexibility to use funds for major life expenses, such as college or a first home, it’s a great financial tool for their future. It also teaches them early lessons about saving and investing. Just remember, your child must have earned income to qualify, and you’ll need to open the account as a custodial IRA.

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