You cannot open and fund a Roth IRA for a child with no income. The IRS requires taxable compensation from the child’s own work to back every dollar contributed, and there is no exception for minors, no workaround using a parent’s income, and no provision that lets gift money alone fund the account.1Internal Revenue Service. Publication 590-A (2025), Contributions to Individual Retirement Arrangements (IRAs) The threshold is low, though. If your child earns even a small amount of qualifying income during the year, you can open a custodial Roth IRA and contribute up to that amount, using gift money if you want to.
What Counts as a Child’s Earned Income
Qualifying income falls into two categories: wages from an employer and net earnings from self-employment. A teenager with a W-2 job at a restaurant or a pool clearly qualifies. Younger children usually earn money less formally, and that income can also count if it’s reported properly.
Self-employment activities such as babysitting, lawn mowing, tutoring, pet-sitting, and selling handmade goods all qualify. The child reports gross income and any business expenses on Schedule C with Form 1040. Only the net profit counts toward the Roth IRA contribution limit. If net self-employment earnings exceed $400, the child also owes self-employment tax and files Schedule SE.2Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Some money a child receives looks like income but doesn’t qualify. Allowances don’t count. Neither do birthday money, gifts, interest, dividends, or capital gains. Paying your child for household chores also doesn’t create earned income, unless the child is genuinely employed in your business.
The annual contribution is capped at the lesser of the IRS maximum or the child’s total taxable compensation for the year.3Internal Revenue Service. Retirement Topics – IRA Contribution Limits A child who earned $1,200 babysitting has a $1,200 ceiling that year, no matter how much a parent or grandparent is willing to contribute. The money used to fund the account doesn’t have to come from the child’s paycheck. A common arrangement: the child spends their earnings like a normal teenager, and a parent or grandparent deposits an equivalent amount into the Roth IRA.
Hiring Your Child in a Family Business
If your child has no income and no summer job in sight, employing them in a family business is one of the cleanest ways to create qualifying earnings. In a sole proprietorship or a partnership where both partners are parents of the child, wages paid to a child under 18 are exempt from Social Security and Medicare taxes.4Internal Revenue Service. Family Employees
The IRS treats this like any other employment relationship. The work has to be real, the pay has to be reasonable for the type of work performed, and the paperwork has to hold up. In practice, that means:
- Actual tasks tied to the business, such as filing, cleaning, organizing inventory, or helping with marketing. Vague or token duties don’t survive an audit.
- Wages comparable to what you’d pay a stranger for the same work. Paying a 12-year-old $50 an hour to shred paper is a red flag.
- Timesheets with dates, hours, and tasks. Payment by check or direct deposit rather than cash. A W-2 issued at year-end.
- A completed W-4 and I-9, an EIN if you don’t already have one, and the child’s Social Security number on file.
Federal income tax on these wages is often zero. For 2025, a dependent’s standard deduction equals the greater of $1,350 or their earned income plus $450, up to the basic standard deduction amount.5Internal Revenue Service. Topic No. 551, Standard Deduction A child earning a few thousand dollars from a family business can owe nothing in federal income tax while still funding a Roth IRA that grows tax-free for decades.
What Happens If You Contribute Without Valid Earned Income
A contribution made when the child has no earned income, or a contribution that overstates what the child actually earned, is treated as an excess contribution. The IRS charges a 6% excise tax on the excess amount for every year it stays in the account.
The fix is time-sensitive. Withdraw the excess and any earnings it generated by the tax filing deadline (including extensions) for the year the contribution was made.6Internal Revenue Service. Instructions for Form 5329 (2025) – Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts The withdrawn earnings are taxable in the year the contribution was made. If the original deadline passes, a six-month grace period after the filing deadline lets you correct the mistake by filing an amended return.
Miss both windows and the 6% penalty hits every year until the excess is removed. On a $3,000 excess contribution, that’s $180 a year for doing nothing, and the penalty has no statute of limitations. It keeps compounding.
Documenting Informal Earnings
Informal self-employment is the most common source of qualifying income for younger children, and it’s also the hardest to prove. A W-2 isn’t required, but if the contribution is ever questioned, you need to show the child actually earned the money.
Keep a simple log for each job: the date, who paid the child, what work was performed, how long it took, and how much was paid. Text messages or emails setting up babysitting or lawn-mowing appointments back it up. Venmo and similar apps create their own transaction history. For cash payments, write down the details immediately rather than trying to reconstruct them at tax time.
The reported income also has to be reasonable for the work. A 13-year-old earning $200 over a weekend of babysitting is plausible. That same child claiming $5,000 in self-employment income with nothing but a parent’s word behind it will invite trouble. A contribution is only as solid as the earnings supporting it.
Who Opens and Controls the Account
Minors can’t sign contracts, so they can’t open brokerage accounts on their own. A parent or legal guardian opens a custodial Roth IRA on the child’s behalf. The child is the legal owner of the assets from day one, but the custodian handles investment decisions and account administration until the child reaches the age of majority.
The transfer age depends on state law and whether the account follows UGMA or UTMA rules. Under UGMA, most states require transfer at 18. Under UTMA, the transfer age is commonly 21, and some states let the custodian specify a later age when creating the account. When the child reaches the applicable age, the account converts into a standard Roth IRA under their sole control.
Opening the account requires the child’s Social Security number, the custodian’s identification, and the brokerage’s custodial account application. Most major brokerages offer custodial Roth IRAs with no account minimums and no annual maintenance fees. Some smaller institutions charge $25 to $75 per year.
Contributions for a given tax year can be made up until the tax filing deadline (typically April 15 of the following year). Filing an extension does not extend this deadline.7Internal Revenue Service. Traditional and Roth IRAs
What the Child Can Do With the Money Later
Roth IRA withdrawals follow an ordering system that favors the account holder. Regular contributions come out first, and since they were made with after-tax dollars, they can be withdrawn at any time, at any age, with no tax and no penalty.8Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs) The contributed portion functions almost like a savings account inside a tax-advantaged wrapper.
Earnings are treated differently. To withdraw earnings completely tax-free and penalty-free, the distribution has to be qualified, which means two conditions are met at once:
- At least five tax years have passed since January 1 of the year the child’s first Roth IRA contribution was made.
- The account holder has reached age 59½, become disabled, died, or is using up to $10,000 for a first-time home purchase.9Office of the Law Revision Counsel. 26 U.S. Code 408A – Roth IRAs
A young adult who withdraws earnings before meeting both conditions owes income tax on those earnings and potentially a 10% early withdrawal penalty.8Internal Revenue Service. Publication 590-B (2025), Distributions from Individual Retirement Arrangements (IRAs) The 10% penalty (not the income tax) is waived for certain expenses, including qualified higher education costs like tuition, fees, books, and room and board.10Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions If your child needs money for college, they can pull out all their contributions tax-free and penalty-free, and if they touch earnings for education expenses, they owe income tax but avoid the 10% penalty.