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What to know about opening a custodial Roth IRA for a child

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What was your first job? Maybe you bagged groceries, mowed lawns or babysat the neighborhood kids. In any case, you remember just how exciting it was to dip your toe into the working world. And also to make your own money. Now that that time is here for your child, it's only natural for them to spend some of their paycheck on short-term wants. As a parent, though, it's important to show them that planning for their future also is essential. You have an opportunity to help them explore more of the financial realm and the different tools they have for saving their earnings.

A custodial Roth IRA is a valuable option to consider. Because they have earned income, you can open this retirement savings account on your child's behalf. It can offer them more than what a simple savings account can—enabling them to benefit from compound growth and learn about tax advantages while also giving them a head start on a lifelong financial journey.

What is a custodial Roth IRA, and what are the rules?

A custodial Roth IRA is a retirement account that's owned by a minor but managed by an adult. In most respects, a custodial account works just like an ordinary Roth IRA. You invest post-tax dollars that you can allocate toward a variety of investments, such as stocks, bonds, mutual funds and exchange-traded funds.

Like a regular Roth IRA, the account balance grows on a tax-deferred basis. Your child can access their contributions tax-free and penalty-free at any time, and the earnings withdrawals made after they reach age 59½ will be tax-free. Because it's meant to be a retirement savings vehicle, any earnings taken out before then may be subject to income taxes and a 10% early withdrawal penalty.1

As the custodian of your child's account, you'll make the contributions and select investments on their behalf. Your child will be required to assume control of the assets at age 18 or 21, depending on your state's law. At that point, they can open a regular Roth IRA independently, and the balance will be transferred to the new account.

Who's eligible for a custodial Roth IRA?

As with other Roth IRAs, the owner must have earned income to qualify. As long as your child has a job or makes money through activities like babysitting or lawn-mowing, you can open an account in their name.

For 2024, the annual contribution limit for a custodial Roth IRA is $7,000, but the amount contributed also can't exceed your child's earnings. For example, if they earn $2,000 during the year, they only can put $2,000 into the IRA. Both you and your child can fund the account, enabling you to help pad their nest egg, although the annual limit applies to the combined contributions from all parties.

Because of the earned income limit, keeping accurate records is critical. This can be easy to do if your child has a job that generates an annual W-2. But if they receive income from informal employment, encourage them to create invoices for the work they perform and the compensation received for it.

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Four benefits of a custodial Roth account

While retirement may seem like a distant goal for a kid, saving now offers several advantages that can pay off in the long run.

1. Compound growth

Any investment returns generated in an IRA—whether realized capital gains, dividends or interest—are automatically reinvested to purchase more shares. Therefore, your child's earnings generate additional earnings, creating a snowball effect. This process, known as compound growth, is even more powerful for younger investors because they have more years for their returns to multiply. Over longer time periods, teens and pre-teens have the potential to achieve greater returns than interest borne from a savings account, although they should understand the risks inherent to investing as well.

2. Tax advantages

Your child can withdraw contributions tax-free and penalty-free at any point. Whatever earnings they receive also are tax-free, as long as they make a qualified withdrawal (examples are discussed in the next section). As a result, they have the potential to obtain a much higher after-tax return on their investment than they would through a fully taxable brokerage account.

3. Flexibility

Roth IRAs are designed to encourage individuals to save for their retirement. But because your child can withdraw contribution amounts without paying a tax or penalty, they still have access to some of the IRA assets if a financial need arises sooner.

There are also certain situations where you can withdraw earnings before age 59½ and avoid the early withdrawal penalty (but not taxes), such as:

  • Eligible college expenses
  • Qualified birth and adoption costs
  • Medical insurance premiums, if:
    • You lost your job.
    • You received unemployment compensation under any federal or state law for 12 consecutive weeks.
    • You took distributions the year you received unemployment compensation or the following year.
    • You received distributions no later than 60 days after returning to work.
  • Unreimbursed medical expenses (that would qualify for a medical deduction) in excess of 7.5% of your adjusted gross income (AGI)
  • Disability needs

4. Financial literacy

Creating a Roth IRA for your child helps them develop money management skills that they'll draw upon throughout their life. When you invest money on their behalf, you have an opportunity to explain how securities like stocks and bonds work and how to build a suitable asset mix. It's also a good way to create realistic expectations for the future. They'll likely find that some stocks that suddenly drop in value eventually rebound and vice versa, which can help them avoid overreacting to short-term fluctuations.

Custodial Roth IRAs vs. traditional IRAs

Custodial IRAs can be either traditional or Roth IRAs, although the latter tend to be more common for minors. The main reason is that most youngsters will get a bigger tax break from a Roth account.

Unlike Roth IRAs, traditional IRAs allow you to deduct your contributions from your taxes but require you to pay income tax when you make withdrawals in retirement. By then, most kids will be in a higher tax bracket than they are today. What makes Roth accounts appealing for younger investors is that the upfront tax benefit that they forgo—the ability to deduct contributions on their tax return—is usually less significant than the perk of being able to make tax-free withdrawals later in life.

There are other advantages to a custodial Roth IRA over a traditional IRA as well. For example, your child won't have to make required minimum distributions when they reach a certain age. They also have more options if they want to access part of their money early.

How to open a custodial Roth IRA

As long as your child has earned income, you can go to any Roth IRA provider and open a custodial account in their name. The application will ask for basic information about the parent, such as your Social Security number and driver's license number.

You would then fund the account with an amount that meets the institution's minimum opening deposit requirements. Later on, you can link a bank account that belongs to you or your child to make additional contributions.

A way to secure your child's financial future

With the ability to benefit from compound, tax-free growth, custodial Roth IRAs can be an effective way to prepare your child for future financial needs. However, before opening an IRA for your child, be sure to consider their investment objectives. If they plan to use the money for college expenses, you may want to explore other options, such as a 529 education savings plan, that allow for the tax-free withdrawal of earnings for education expenses.

If you need guidance finding the right savings strategy for your minor, connect with a Thrivent financial advisor who can put your family on the right path.

1Distributions of earnings are tax free as long as your Roth IRA is at least five years old and one of the following requirements is met: (1) you are at least age 59½; (2) you are disabled; (3) you are purchasing your first home ($10,000 lifetime maximum); or (4) the money is being paid to a beneficiary.

Investing involves risk, including the possible loss of principal. The product prospectus, portfolios' prospectuses and summary prospectuses contain more complete information on investment objectives, risks, charges and expenses along with other information, which investors should read carefully and consider before investing. Available at

Offered through a brokerage arrangement with Thrivent Investment Management Inc. 529 college savings plans are not guaranteed or insured by the FDIC and may lose value. Consider the investment objectives, risks, charges, and expenses associated before investing. Read the issuers official statement carefully for additional information before investing. Investigate possible state tax benefits that may be available based on the state sponsor of the plan, the residency of the account owner, and the account beneficiary. Consult with a tax professional to analyze all tax implications prior to investing.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.