How a Roth IRA for Kids Could Turn Small Savings Into $1 Million

Can children have IRAs?

Yes—children can have IRAs, and there is no minimum age requirement. The key qualification is that the child must have earned income.

For families focused on long-term financial success, this creates a powerful opportunity. Starting early allows children to benefit from decades of tax-advantaged compound growth, potentially turning small contributions into substantial wealth over time.

For example:
If a child contributes $7,500 annually from ages 14 through 24 and earns an average 7% return, those contributions could grow to over $1 million by age 56—even if they never contribute again after age 24.

Why should you consider opening an IRA for your child?

Opening an IRA for your child isn’t just about retirement—it’s about:

• Teaching financial responsibility
• Creating long-term investment habits
• Taking advantage of decades of tax-free or tax-deferred growth

It’s one of the few strategies where time does most of the heavy lifting.

How do you open an IRA for a child?

1. Open an IRA for any child with earned income

If your child earns money—whether through babysitting, part-time work, or helping in a family business—they may be eligible to contribute to an IRA.

• The contribution limit is $7,500 per year or the child’s earned income, whichever is less.
• For minors, you’ll need to open a custodial (guardian) IRA managed by a parent or guardian.

Can parents contribute to a child’s IRA?

2. Yes—parents can gift money for contributions

Even if your child wants to spend their earnings, you can still help them build wealth.

As long as the child has earned income, you can gift money to fund their IRA contribution. This allows them to enjoy their income today while still investing for the future.

Should a child use a Roth IRA or traditional IRA?

3. Why is a Roth IRA usually better for children?

A Roth IRA is often the preferred choice for young savers.

Here’s why:

• Contributions can be withdrawn at any time, tax- and penalty-free
• Investment growth has the potential to be completely tax-free
• Children are typically in a very low tax bracket, making traditional IRA deductions less valuable

In contrast, traditional IRA withdrawals are taxable and may incur penalties if taken before age 59½.

How should a child’s IRA be invested?

4. What is the best investment strategy for a child’s IRA?

Children have a major advantage: time.

Because they won’t need the money for decades, they can typically afford to invest more aggressively for growth.

• Historically, stock-based investments have averaged around 7% annual returns
• More conservative investments (like bonds at ~3%) may significantly limit long-term growth

In fact, using a 3% return instead of 7% could reduce a $1 million outcome to approximately $229,000.

The key takeaway: Being too conservative early on can be costly over time.

What records do you need to keep for a child’s IRA?

5. Why is proper documentation important?

To ensure compliance and avoid issues:

• Make sure your child’s income is legitimate and documented
• Report income on the child’s or parent’s tax return as required
• If using a family business, ensure the work is real and appropriately compensated
• Keep track of IRA contributions and investments

Good recordkeeping helps protect the integrity of the strategy and ensures long-term success.

Is opening an IRA for your child worth it?

For many families, the answer is yes.

Starting early with an IRA can:

• Build significant long-term wealth
• Instill lifelong financial habits
• Provide flexibility through Roth IRA contribution access
• Create a meaningful financial head start

This strategy isn’t just about saving—it’s about positioning the next generation for financial independence.

Next Steps: Learn More

To explore this strategy in more detail, download our guide: “Using IRAs to Help Children in 5 Easy Steps.”

Financial Success Doesn’t Happen by Chance.

Contact one of our talented advisors at 940-464-4104, to discuss your beneficiary or investment questions. You may also schedule a free virtual consultation here.

RFG Wealth Advisory in Argyle, Texas, is an independent, fee-only Registered Investment Advisor firm that always puts our clients’ interests first. We have a transparent, simple fee structure that’s easy to understand. Call us today!