Shabby Chic Boho You know that proud moment when your child finally figures out how to tie their own shoes or rides a bike without training wheels? It is a mix of joy and a little disbelief at how fast they are growing. As parents, we are always looking for ways to give them a head start in life. One of the best ways to do that is by helping them grow their money wisely through UGMA accounts and other tools for investing for kids.
So, what exactly is a custodial Roth IRA? Think of it as a retirement account you open and manage for your child until they’re old enough to take over. Unlike UGMA accounts, which can be used for a wide range of expenses, the custodial Roth IRA is focused on long-term growth. The money you contribute has already been taxed, so it can grow tax-free over the years. When your child reaches retirement age, they won’t owe any federal taxes on qualified withdrawals.
But there’s a catch: your child needs to have earned income. This isn’t money from birthday gifts or allowance; it has to come from actual work. Whether it’s a summer job, babysitting, mowing lawns, or running a small online business, as long as they earn money, they can contribute. Just keep good records of their earnings. You can contribute up to the lesser of what they earned or the annual limit, which is $7,000 for 2025. UGMA accounts don’t have this earned income requirement, which makes them more flexible in some situations.
Beyond the tax benefits, there are other reasons to love a custodial Roth IRA. You guide your child’s financial journey by choosing investments and teaching them about saving and investing. While the main goal is retirement, this account offers flexibility. Contributions can be withdrawn anytime without penalty or tax. For big life events like college or buying a first home, withdrawals from earnings can also be penalty-free. UGMA accounts offer similar flexibility for expenses, making them a useful complement.
No financial tool is perfect for every situation. The earned income rule can be a hurdle if your child is too young to work. The annual contribution limit means you can’t exceed the set maximum. UGMA accounts don’t have these limits, but withdrawals aren’t tax-free in the same way as Roth IRAs. Using both tools together can give your child options for now and the future.
Getting started is simple. Research a bank or brokerage that offers custodial Roth IRAs. You’ll need your child’s Social Security number and records of earned income. Open the account, start contributing, and choose investments like stocks, bonds, or mutual funds. UGMA accounts can be opened similarly, often with fewer restrictions.
Opening a custodial Roth IRA and using UGMA accounts is about more than money. It’s about teaching responsibility, building a legacy, and giving your child a head start they might not otherwise have. Investing in their future today is one of the most powerful gifts you can give. Starting early with these accounts gives your child a lifelong advantage and teaches them that smart money habits can be fun and rewarding.
