A Guide to Starting a Roth IRA for a Child
A Roth IRA can be one of the most powerful tools to set a child or teenager on the path to lifelong financial success. By contributing earned income into a tax-free retirement account early, parents can not only help their children build wealth that compounds for decades, it can also create conversations around saving for the future that gives a child the gift of perspective.
However, funding a Roth IRA for a child does add some complexity. The rules around who qualifies, what counts as income, and when taxes apply can be confusing—especially when minors earn money from babysitting, lawn care, or other age-appropriate jobs.
Starting, Funding, and Managing a Roth IRA
There is really only one requirement to be able to fund a Roth IRA – the child must have earned income.
That’s it! No age requirements on this one. You can open a Roth IRA for a newborn if they have earned income.
As with normal Roth IRA’s, there is a limit on contributions. In 2025, the limit is $7,000 per year. See 2025 Tax Resources – Gilbert Wealth for updated limits.
However, financial accounts cannot be managed by a minor so a parent or guardian must act as the custodian for the account until the child reaches age of majority (typically 18 to 21 years old). This type of account is called a “Custodial Roth IRA” and can be opened at many investment providers like Charles Schwab, Fidelity, Vanguard, etc.
Where It Gets Complicated
The complication with funding a Roth IRA for a minor is that there are different requirements surrounding preparing and filing tax documents depending on the situation.
There are two types of taxes to consider here:
Federal Income Tax: Taxes applied to all income on the IRS Form 1040.
FICA/SECA: Social Security, Medicare, Self-Employment Tax.
These will apply based on the source of the earned income.
Third Party Employer
Complexity: Low
Taxes: Medium
If a minor works for a traditional employer (fast food, grocery store, retail), their paycheck will include federal and state income tax withholding (if applicable) and FICA (Social Security and Medicare). FUTA (federal unemployment tax) is paid by the employer, not the minor.
Typically, you’d only file a tax return if the minor had income taxes withheld.
Self-Employment
Complexity: Medium
Taxes: High
Babysitting, lawn mowing, tutoring, and similar jobs are typically treated as self-employment. If net earnings exceed $400, the child must file a tax return and pay self-employment tax (which substitutes for FICA). If earnings are under $400, no self-employment tax is due, though the income still counts for Roth IRA eligibility.
Typically, you’ll file a Form 1040 with a Schedule C to report the income and a Schedule SE to calculate self-employment taxes.
Self-employment taxes are 12.4% for Social Security and 2.9% for Medicare for a total of 15.3%.
Family-Owned Business (sole proprietorship or parent partnership)
Complexity: Medium
Taxes: Low
If a child works for a parent’s sole proprietorship or partnership in which both partners are the child’s parents, FICA and FUTA taxes do not apply until age 18 (FICA) or 21 (FUTA). This makes employing your child in a family business especially attractive.
Typically, you wouldn’t have to file a form 1040 but you would issue the child a W2.
What to Know About Income
Eligible income includes wages from a part-time job (with a W-2) or self-employment such as babysitting, lawn care, tutoring, or other age-appropriate work.
Not allowed: Allowance, gifts, or payment for ordinary household chores (e.g., cleaning their room, mowing the family lawn, doing dishes). These don’t qualify because they aren’t considered market-based work.
Excessive Payment: Additionally, the IRS will question if you pay your child $500 per hour to make copies. Pay should be reasonable for the tasks performed.
Documentation matters: Income should be reported on a tax return, either through a W-2 or on Schedule C for self-employment. Even small amounts should be tracked (dates, hours, and payment received) so contributions are backed by verifiable records.
In short – if it’s real work someone would reasonably pay for in the marketplace, it qualifies. If it’s just family chores or unreported cash, it doesn’t.
In Summary: Easiest to Most Complex
- Job with a Third-Party Employer: W-2 issued, payroll taxes withheld, straightforward tax return.
- Self-Employment Income Under $400 per Year: Requires recordkeeping and a basic return to document income, but no self-employment tax is due.
- Job in a Family-Owned Business: W-2 issued by the parent’s business, no FICA under age 18 (in certain structures), still relatively simple.
- Self-Employment Income Over $400 per Year: Most complex – requires filing Schedule C and Schedule SE, plus payment of self-employment tax.