If you’re a parent and a business owner who loves a good tax strategy, setting up a Roth IRA for your child might be one of the most satisfying financial power moves you can make. It’s like giving your kid a head start on retirement savings without waiting until they’re old enough to spell “compound interest.”

Let’s walk through how Roth IRAs for minors work, how to set one up, and how these contributions can benefit your child and your business.

What Is a Roth IRA for a Minor?

A Roth IRA for a minor is known as a custodial Roth IRA. Like other Roth IRAs, it’s an individual retirement account where you make contributions with after-tax dollars. This means you don’t get a tax deduction now, but the earnings grow tax-free, and qualified withdrawals in retirement are also tax-free.

The primary difference with a custodial Roth IRA is that an adult opens and manages it on behalf of a child under the age of 18 (or 21 in some states). The account is in the child’s name, but you control it until they reach the age of majority. Once the child reaches the age of legal adulthood, the account becomes theirs entirely.

In other words, you can set up a nest egg for a school-aged child that won’t be taxed 60 years from now.

Rules for Roth Contributions

Custodial Roth IRAs have to follow the same rules as other Roth accounts. The one that trips some people up is that the child must have earned income to contribute to a Roth IRA.

“Earned income” means money they received for actual work performed, such as babysitting, lifeguarding, mowing lawns, or working in your business. Allowance doesn’t count.

This rule stops many families from establishing a Roth IRA until the child is older, but business owners have an advantage. If you hire your child (within reason and in accordance with labor laws), their wages qualify as earned income. 

How much can a child contribute?

The contribution limit for minors is the same as for other people under age 50. For the 2025 tax year, that’s $7,000 or the child’s total earned income, whichever is less.

So, if your teenager earns $3,000 helping with social media for your business, the maximum contribution is $3,000. It doesn’t matter who contributes the funds as long as the amount doesn’t exceed their earned income. You can make a contribution on their behalf, which is a great way to reward hard work and build financial habits early.

How to Set Up a Roth IRA for a Minor

Setting up a custodial Roth IRA is straightforward, and you can usually set one up online through most major brokerage firms, like Fidelity, Vanguard, or Charles Schwab. Here’s how:

1. Confirm the child’s eligibility. They must have documented earned income, so keep good records like pay stubs or invoices.
2. Choose a brokerage. Look for one that offers custodial Roth IRAs with low fees and flexible investment options.
3. Complete the application. As the parent or guardian, you’ll act as the custodian. You’ll need your information and your child’s Social Security number.
4. Fund the account. Transfer money up to the earned income limit (or the annual cap, whichever is lower).
5. Select investments. Many custodial IRAs allow you to invest in mutual funds, index funds, or ETFs. Base your investment decisions on your risk tolerance and timeline, keeping in mind that your child is unlikely to need to access the money for decades.

Why It’s a Smart Move as a Business Owner and a Parent

If you own a business, a Roth IRA for your child can deliver multiple wins.

First, there are tax benefits for your business. Paying your child a legitimate wage creates a deductible expense for the company. This reduces your taxable income. Just make sure the job and pay are appropriate for their age and skill level. In other words, you can’t pay your six-month-old $15,000 per year to manage your social media. That won’t hold up if the IRS selects your return for audit.

On the other hand, you can pay your 10-year-old a reasonable hourly wage to empty the trash cans and vacuum your office on the weekends. 

Plus, as long as your child’s earned income is less than the standard deduction for single filers ($15,000), they may not have to file a tax return or pay taxes at all. 

Just keep in mind that your child may need to file a tax return if they have other sources of income, such as $1,350 or more in unearned income, like interest, dividends, or capital gains, or $400 or more in self-employment income.

A few years of modest contributions can grow into hundreds of thousands of dollars over time, thanks to decades of tax-free compounding.

For example, say you start contributing $1,000 per year to your child’s Roth IRA, starting at age 13. You continue for 10 years, at which point they graduate from college, get a job and start making their own retirement contributions.

Using a Custodial Roth IRA Calculator, we can calculate that if your child never contributed another dollar to that account, assuming a 7% annual rate of return, their Roth IRA balance would be $236,873 at age 65. That’s a nice little nest egg based on just $10,000 in starting contributions.

Turn early earnings into lasting wealth

Setting up a Roth IRA for your minor child is one of those rare financial strategies that’s both simple and powerful. You help your child learn about money, invest for their future, and potentially enjoy tax advantages for your business, all in one move.

If you’d like guidance on how to structure payments to your child, document earned income, or coordinate your business payroll with a Roth IRA strategy, please reach out! We’d love to help you make sure your approach follows the tax laws and benefits your family and your business for years to come.