The Best Head Start You Can Give Your Kids (If They Have Earned Income)
There’s an account that’s better than a 529 for saving for your kids’ future. More flexible, better for financial aid, better tax treatment. It can be used for retirement, buying a first home, education, or emergencies - all tax-free in different ways.
It’s called a Custodial Roth IRA. And if your child has earned income, this should be your first priority - before a 529, before anything else.
The catch? They have to have earned income. No earned income, no Custodial Roth. Period. But if your child does have income - from a summer job, babysitting, mowing lawns, working in your business - this is the single most powerful savings vehicle available to them.
What follows is two things: an explanation of why this account is so powerful, and a practical guide to setting it up. Feel free to read through for the full picture, or skip ahead to “Here’s how to run this play” if you’re ready to get started.
A Custodial Roth IRA works just like a regular Roth IRA, but it’s set up for a minor with an adult acting as custodian until the child reaches adulthood - typically 18 or 21 depending on your state. You contribute after-tax money. It grows tax-free. And qualified withdrawals in retirement are completely tax-free.
But here’s what makes it special: there are two separate pools of money inside a Roth IRA - contributions and earnings - and they have different rules.
Contributions - the money you put in - can be withdrawn anytime, for any reason, tax-free and penalty-free. Your child needs cash for something? The contributions are always accessible. No questions asked.
Earnings - the investment growth - have more restrictions, but they’re still remarkably flexible. They can be withdrawn penalty-free for a first-time home purchase (up to $10,000), for qualified education expenses, or for medical bills above 7.5% of income. And after age 59½, everything comes out tax-free.
Compare that to a 529. With a 529, the money is tied to education. Use it for something else and you face income tax plus a 10% penalty on the earnings. Yes, the new Roth rollover option helps, but it has a $35,000 lifetime cap and requires the account to be open for 15 years.
The Custodial Roth has no such limitations. It’s education money, retirement money, first-home money, emergency money - all in one account.
Let me tell you how this has worked in my own family. I have two sons. I started Custodial Roth IRAs for them when they were 5 and 9 years old. They’ve earned income by working in my business - cleaning the office, putting away files, shredding documents, collating papers, preparing handouts. Basic light office work that kids their age can legitimately do.
We’ve been contributing ever since. The accounts have grown. The total is now about 50% more than what we put in - meaning roughly two-thirds is what they earned and one-third is investment growth. And we’re nowhere near done.
I keep a photo of my son shredding documents in the office as documentation. If there’s ever a question from the IRS, here’s additional evidence that lines up with the hours and pay records. That’s the kind of simple documentation that protects you.
Now let me walk you through the tax magic that happens here - especially if you have a side business.
Think about the journey of a dollar. It comes into your business as revenue. You pay it out as wages to your child for legitimate work. That’s a business deduction for you - reduces your taxable income. Your child receives the income, but if they earn less than the standard deduction ($16,100 for 2026), they owe no federal income tax. They put that money into a Roth IRA. It grows tax-free. They take it out in retirement tax-free.
A dollar comes into your business, goes all the way through to your child using it in retirement, and is never taxed.Not once.
Even if your child works for someone else - a summer camp, a restaurant, a retail store - the Roth benefits are still powerful. The dollar might get taxed once when they earn it, but everything after that is tax-free growth and tax-free withdrawal. That’s still remarkable.
Let me show you the math on what time does to these contributions.
Say your teenager has summer jobs from age 14 to 17 and contributes $3,000 each year. That’s $12,000 in total contributions over four years. At 7% average annual returns, left until age 65, that becomes roughly $250,000 - all tax-free.
Or take a different scenario. Say you have a side business and your child can do legitimate work for you from age 12 to 18 - seven years. You max out contributions at $7,500 per year (the 2026 limit). That’s $52,500 in total contributions. At 7% returns, left until age 65? Approximately $1.2 million. Tax-free.
These aren’t wealthy families making huge deposits. These are regular families setting aside modest amounts from summer jobs and part-time work. The power isn’t in the contribution size. It’s in the time.
There’s another major advantage: financial aid. A Custodial Roth IRA is not counted as an asset on the FAFSA - retirement accounts are excluded. Compare that to a 529, which is counted as a parental asset and can reduce aid eligibility by up to 5.64% of its value. $10,000 in a 529 might reduce your child’s financial aid by $564. $10,000 in a Custodial Roth? Zero impact on the asset side. (If you do withdraw earnings for college, they may be included as income on a future FAFSA - something to consider in your timing. But the asset itself? Invisible.)
Now let’s talk about the catch: earned income.
This is non-negotiable. Your child must have earned income to contribute to a Custodial Roth IRA. No earned income means no contributions.
What counts as earned income? Anything that shows up on a W-2, a 1099, or gets reported on a tax return:
Summer jobs (camp counselor, lifeguard, retail, restaurant)
Working for a parent’s business (with proper documentation)
Self-employment income (babysitting, lawn mowing, pet sitting, tutoring)
Social media income, YouTube revenue, selling crafts online
What doesn’t count? Allowances, cash gifts from relatives, investment income.
Documentation is critical - especially for self-employment income. If your child has a W-2 job, you’re covered. For babysitting, lawn mowing, or other gig work, keep a simple log: date of service, who hired them, what they did, how long it took, how much they earned. Photos, signed receipts, text messages confirming the arrangement - anything that corroborates the income helps.
And here’s the critical step most people miss: file a tax return for your child, even if they owe nothing. If their income is below the standard deduction, they won’t pay federal taxes. But that tax return documents the income, which is what you need to justify the Roth contribution.
A word on legitimacy - especially if your child works for you.
There’s no official minimum age for a Custodial Roth IRA. The question is: can they legitimately do the work you’re paying them for?
The IRS looks for two red flags. Overpayment: If you pay your child $100 to mow the lawn for an hour, that’s a problem. Compensation has to be fair - what you’d pay a non-family member for the same work. $15-20 an hour for basic tasks is reasonable. $50 an hour for shredding documents is not. Work they can’t actually do: A 5-year-old can carry things, clean up, restock supplies. A 5-year-old cannot develop your marketing campaign. The work has to match what a child that age could realistically accomplish.
I know someone with a childcare business who employs her three children, ages 5 to 14, on weekends. They clean, wash sheets and towels, restock snacks. Even the 5-year-old pitches in with tasks appropriate to that age. That passes the smell test.
Ask yourself: if an IRS auditor saw this arrangement, would it look legitimate? Is the pay reasonable for the work? Could a child this age actually do this? Do I have documentation? If yes to all three, you’re fine.
The mechanics are straightforward.
You - the parent or grandparent - open the account as custodian. The child is the owner, but you control the account until they reach adulthood. When they turn 18 (or 21, depending on your state), the Custodial Roth converts into a regular Roth IRA in their name.
The 2026 contribution limit is $7,500 - but contributions cannot exceed the child’s earned income for the year. Earned $2,000? Max contribution is $2,000. Earned $10,000? Max is $7,500.
One more thing: anyone can provide the contribution money, as long as the child had the earned income. Your child earns $3,000 at a summer job and wants to spend it? A grandparent can give the child $3,000 as a gift, and you put $3,000 into the Roth. The child keeps their earnings, the Roth gets funded. This is a great way for grandparents, aunts, and uncles to contribute to a child’s future.
Here’s how to run this play.
Confirm your child has earned income. W-2 job? You’re set. Self-employment? Keep a log of every job and payment.
Open a Custodial Roth IRA at Fidelity, Schwab, or Vanguard. You’ll need the child’s Social Security number and your information as custodian.
Invest in a growth-focused index fund. Given the ultra-long time horizon, something like a total stock market index fund makes sense.
File a tax return for your child, even if they owe nothing.
Talk to your child about it. Show them the account. Help them understand this is being built up during their childhood - a one-time opportunity. The goal is for them to internalize the value.
One more thing. If you have a side business - even a small one - this opens a door. You can hire your child for legitimate work, deduct the wages as a business expense, and create earned income that qualifies for a Custodial Roth. The tax benefits multiply. We’ll cover the details of how to hire your kids properly in a future post.
So where does this leave you?
If your child has earned income - from a job, from self-employment, from working in your business - open a Custodial Roth IRA this month. It should be your first priority, before a 529, before anything else.
If they don’t have earned income yet, watch for opportunities. A summer job at 14 or 15 can be the start of something powerful.
This is for regular families. Small amounts matter. Summer jobs count. The power is in the time.
Start now.