TL:DR
So, you’re thinking about the financial future of your child. Kudos to you! Setting up an investment account for your kids isn’t just wise—it’s potentially life-changing. You’re not only giving them a head start on saving for the future, but you’re also teaching them valuable lessons about money and investing. Among the best tools for this? A Custodial Roth IRA.
Playing the Long Game
With more than half of adults concerned about being able to retire comfortably, imagine if we were able to go back and time and change that. Imagine if you could go back in time and start investing as a kid. With all those years ahead, even the smallest contributions could grow into something substantial. For kids, investing early means more time for their money to grow—and this is where compound interest, or “the snowball effect,” comes into play.
Compound interest is like a magical formula that makes your money work harder the longer it sits. Imagine you’re rolling a tiny snowball down a hill. At first, it’s small, but as it rolls and picks up snow, it gets bigger and bigger until—boom!—you have a giant snow boulder. Compound interest works the same way. Your child’s investments earn a little return, then those returns start earning returns of their own. And over a few decades, that little initial investment can grow into a pretty hefty sum.
What Exactly Is a Custodial Roth IRA? Think of It as a “Forever Gift” for Your Child
A Custodial Roth IRA is a retirement account set up by a parent or guardian on behalf of a minor. While a traditional Roth IRA is something you usually open as an adult, the custodial version allows kids to start early.
Let’s break it down: it’s like buying a gift that won’t get used right away but will appreciate significantly over time. Think of it as planting a seed in a “money tree” that’ll take a few decades to grow—by the time it’s fully bloomed, your child can use it for important life milestones. And yes, while it’s officially a “retirement” account, a Custodial Roth IRA actually offers multiple benefits that can come in handy sooner.
But hold up, there’s a catch! For your child to have a Custodial Roth IRA, they need to have earned income. In other words, your kid needs to have made some money. Babysitting, mowing lawns, or that part-time job at the smoothie shop can all qualify. If they have earned income, they’re in the clear!
Where Can You Open a Custodial Roth IRA for Your Child?
There are several reputable financial institutions where you can open a Custodial Roth IRA for your kid. Here are a few options to consider:
Fidelity: Known for its low fees and excellent customer service, Fidelity offers custodial Roth IRAs with no minimum balance requirements.
Charles Schwab: Schwab’s user-friendly platform makes it easy for parents and young investors to get started. They offer a variety of resources to help you and your child learn more about investing.
Vanguard: A favorite among long-term investors, Vanguard is a solid option if you’re looking for low-cost index funds and ETFs within your Roth IRA.
Each of these platforms offers online access, making it easy to manage the account and track growth over time.
Custodial Roth IRA vs. Custodial Brokerage Account: Which One Fits Your Kid’s Goals?
While both accounts are under the “custodial” umbrella and offer investment opportunities, they serve slightly different purposes:
Custodial Roth IRA: This is a retirement account with tax-free growth, and contributions can be withdrawn without penalties. However, earnings can only be accessed without penalty after age 59½ (with some exceptions).
Custodial Brokerage Account: This is a taxable account where you and your child can invest in stocks, bonds, mutual funds, etc. There are no penalties for withdrawals, but it does incur taxes on gains. This type of account is ideal for shorter-term goals, like saving for college or a car.
To sum it up: if your child wants to keep their money growing for the long haul, the Custodial Roth IRA is a great fit. If they have shorter-term savings goals, the Custodial Brokerage Account might be more their speed.
Growing Money, Tax-Free
Here’s the best part: Unlike custodial brokerage accounts, custodial Roth IRAs grow tax-free! Since contributions are made with post-tax dollars (money that’s already been taxed), there’s no tax bill down the line for withdrawing these contributions. And any earnings? Tax-free after age 59½.
In the meantime, your child’s contributions (the money you deposit), can be withdrawn tax-free at any time. This tax-free status can make a world of difference over the long run, especially if your child continues to invest over their lifetime. Imagine that: tax-free growth, all because you helped them start early!
Eligibility Requirements: The “Earned Income” Rule
Regarding the "catch" we talked about earlier? Well, in order to open a custodial Roth IRA, your child must have earned income, which is money they’ve made from a job or self-employment. But here’s the kicker—the amount they contribute can only be up to the amount they earned. So, if your child earned $2,000 this year babysitting, they can contribute up to $2,000 into their Custodial Roth IRA.
Benefits and Uses of a Custodial Roth IRA: More Than Just Retirement Savings
A Custodial Roth IRA has several amazing uses:
Tax-free growth: As we mentioned earlier, this account grows tax-free over the years, creating a solid foundation for their financial future.
Flexibility: Contributions (but not earnings) can be taken out at any time. They can even be used toward education or their first home purchase.
First home: Your child can use up to $10,000 of Roth IRA earnings (without penalty) to buy their first home, giving them an early boost toward real estate investing.
Education costs: Withdrawals can be used toward qualified education expenses without the usual Roth IRA penalty (though earnings would be taxed).
Each of these benefits makes the Custodial Roth IRA one of the most flexible investment accounts for young people. And by teaching them to think about this money as a long-term investment, you’re helping to instill a powerful financial habit.
Financial Literacy: The Key to Long-Term Financial Health
While a great first step, simply opening an account isn’t enough—it’s equally important to teach kids how investing works. Financial literacy skills are vital, as they empower your child to make smart financial decisions and build wealth over time.
Investing may feel intimidating for kids at first, but learning early pays off in more ways than one. And you don’t have to do it alone! That’s where KidVestors comes in.
At KidVestors, we make financial literacy fun and engaging for kids. We believe that learning how to manage money shouldn’t feel like a chore, so we use avatars and games, animated videos, and interactive activities that capture kids’ interest and make learning about money enjoyable. Your child will learn the basics of saving, investing, entrepreneurship and smart spending—key skills that can serve them well throughout life.
Our platform also includes virtual stock trading across global exchanges, so kids can practice investing in a safe, risk-free environment. They can explore how stocks grow over time, experiment with different strategies, and get a feel for how the market works, all while earning KV Bucks™ rewards along the way to convert into REAL CASH. And for you, it’s peace of mind that your child is building financial knowledge they’ll carry with them into adulthood.
Building Financial Knowledge, One Investment at a Time
Opening a Custodial Roth IRA is more than just setting up a retirement account—it’s a valuable opportunity to introduce your child to the power of investing and compounding interest. By helping them start young, you’re giving them a solid financial foundation, and with KidVestors by your side, they’ll have the tools to grow into savvy, confident investors. Let’s make the future bright—one investment at a time!
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