For self-employed individuals with children, there’s a planning strategy that often slips under the radar: the custodial Roth IRA. It’s a simple idea with a powerful long-term impact — helping kids start investing years earlier than most people do.
At Pathview Wealth Advisors, we often talk about the value of time in investing. The earlier you start, the more time compounding has to work in your favor. That’s where a custodial Roth IRA comes in; it’s not just an account, it’s a teaching tool for the next generation.
What Is a Custodial Roth IRA?
A custodial Roth IRA is a retirement account opened by an adult on behalf of a minor. While the account technically belongs to the child, the adult manages it until the child reaches the age of majority. Contributions must come from earned income, meaning the child needs to have a legitimate job.
Self-employed parents have a unique advantage. You can hire your kids for age-appropriate tasks within your business, such as filing, organizing, helping with digital content, and pay them a reasonable wage. That earned income can then be contributed to a Roth IRA.
Why a Custodial Roth IRA is Worth Considering
Let’s play out a scenario. Suppose a 14-year-old earns $7,000 in a year and contributes the full amount to a Roth IRA. If that money grows at an average annual rate of:
- 7%, it could grow to approximately $157,000 by age 60
- 5%, the value might reach around $66,000 by age 60
- 3%, it could be about $27,000 by age 60
These figures are based on one year’s contribution and assume consistent annual growth without additional contributions¹ — showing how even a small contribution at a young age has the potential to grow into something significant later.
How a Custodial Roth IRA Works in Practice
- Tax-Advantaged Growth: In retirement, Roth IRAs allow for tax-free growth and tax-free withdrawals (if certain conditions are met).
- No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs do not require distributions at a specific age.
- Access to Contributions: Children can withdraw contributions (but not earnings) at any time without penalty — adding flexibility.
- Financial Education: Managing an investment account can help young people build financial awareness and responsibility early on.
Key Considerations
- Earned Income Must Be Legitimate: The IRS requires the income be legitimate and properly documented. This includes maintaining records, issuing paychecks, and filing taxes as needed.
- Contribution Limits Apply: For 2025, the maximum contribution is the lesser of the child’s earned income or $7,000.
- Investment Selection Matters: As with any investment account, the portfolio should align with the account holder’s time horizon and risk tolerance.
Why Families Might Want to Explore This
This approach is not about predicting markets or finding the next big opportunity. It’s giving your child a financial head start. For families with the flexibility to implement it, a custodial Roth IRA may be a way to introduce children to investing and long-term planning.²
Turning Strategy Into Action
A custodial Roth IRA may not be the right fit for every family, but for self-employed parents it can be a meaningful way to combine business, family, and future financial planning. As with any financial decision, it’s important to evaluate the specifics of your situation and consult with a qualified tax advisor or fee-only financial planner.
Pathview Wealth Advisors is located in San Diego, and we work with clients locally and across the country to help them navigate tax-efficient strategies and long-term planning.
If a custodial Roth IRA sounds like a fit for your family’s unique needs, please contact us to learn more about setting up your child for long-term financial success.
Disclaimers
¹ These figures are for illustrative purposes only and are based on hypothetical rates of return. They do not represent actual or guaranteed performance. Investment outcomes will vary based on market conditions, fees, taxes, and other factors.
² Any projections or examples provided are hypothetical and for illustrative purposes only. They are not guarantees of future results and should not be relied upon as investment advice.
Yes, self‑employed parents can open a custodial Roth IRA for their child as long as the child has legitimate earned income. Many self‑employed business owners pay their children for age‑appropriate work—such as filing, administrative help, or assisting with digital content—and then contribute those earnings to a Roth IRA in the child’s name. The account is managed by the parent until the child reaches the age of majority.
Yes. The IRS requires that all Roth IRA contributions come from earned income, even for minors. Gifts or allowances do not qualify. The income must be reasonable for the work performed and properly documented, including payroll records and tax filings when required. The contribution limit is the lesser of the child’s earned income or the annual Roth IRA limit.
A custodial Roth IRA offers tax‑free growth and tax‑free withdrawals in retirement, assuming IRS rules are met. Unlike traditional IRAs, Roth IRAs have no required minimum distributions (RMDs). Because children have decades for compounding, even small contributions made early can potentially grow significantly over time.
Yes, with limitations. Contributions (but not earnings) can be withdrawn at any time without taxes or penalties. Earnings withdrawn early may be subject to taxes and penalties unless an exception applies. This flexibility can make a custodial Roth IRA both a long‑term retirement tool and an educational account for teaching financial responsibility.
For many self‑employed families, a custodial Roth IRA can be a powerful planning opportunity. It allows parents to combine business planning, tax efficiency, and financial education while giving their child a long‑term investing head start. While it isn’t right for every family, it’s often worth exploring with a qualified tax advisor or fee‑only financial planner.
A child can contribute up to the lesser of their earned income or the annual Roth IRA limit ($7,000 for 2025). If a child earns $3,000, they can contribute up to $3,000. Contributions cannot exceed documented earned income.
Yes. Parents can gift money to fund the contribution, but the child must have earned income equal to or greater than the contribution amount. The IRS looks at earned income, not the source of the contribution dollars.
Yes, but typically minimally. Retirement accounts like Roth IRAs are not counted as assets on the FAFSA, but withdrawals can count as income, which may impact future aid calculations.
No. There is no minimum age requirement. A child of any age can have a custodial Roth IRA as long as they have legitimate earned income.
Yes. Informal work like babysitting, tutoring, or freelance work can qualify as earned income if it is legitimate, documented, and reported appropriately for tax purposes.
Parents should keep payroll records, time logs, job descriptions, and proof of payment. Proper documentation helps support that income is legitimate and compliant with IRS requirements.
In some cases, yes. Paying children for legitimate work can shift income into a lower tax bracket, and contributions to a Roth IRA grow tax-free. The primary benefit, however, is long-term tax-free growth for the child.
They serve different purposes. A 529 plan is designed for education savings with tax advantages for qualified expenses. A custodial Roth IRA offers broader flexibility, including retirement savings and access to contributions. Many families use both.
Excess contributions may be subject to penalties if not corrected. It’s important to match contributions exactly to earned income and address any overcontribution promptly.
Indirectly, yes. Grandparents can gift money to the child or parents, but the child must have earned income to justify the contribution. The IRS ties eligibility to earnings, not who funds the account.
It can be repeated every year the child has earned income. Consistent annual contributions can significantly increase long-term compounding potential.