A custodial Roth IRA can help you plan for your child’s retirement before they even leave home. There are worthwhile tax advantages, but there are limits around who’s eligible for an account and how your child can use the money. 

A custodial account for investing (such as a UGMA/UTMA—which in this article we’ll refer to as an “investment account for kids”) can maximize flexibility and be a convenient option for many families, but it has fewer tax advantages, and withdrawals must be for the benefit of the child.

Get the details to help you plan which account type (or combination) could be right for your kids.

How UGMA/UTMA Accounts Work

A UGMA/UTMA account follows guidelines laid out in the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act (details can vary by state). You contribute money and invest on your child’s behalf until they come of age to take control of the account (typically age 18 or 21, and in some states you can choose an alternative age). Any contribution to the account becomes your child’s property, and they can use the funds for just about any purpose.

How to open a UGMA account

A UGMA/UTMA account follows guidelines laid out in the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act (details can vary by state). You contribute money and invest on your child’s behalf until they come of age to take control of the account (typically age 18 or 21, and in some states you can choose an alternative age). Any contribution to the account becomes your child’s property, and they can use the funds for just about any purpose.

What is a Custodial Roth IRA?

A Roth IRA is a retirement account you fund with after-tax dollars. If you fund the account for at least five years and don’t take distributions until you reach age 59½, then your qualified withdrawals are tax-free—including gains on the investments. You can also withdraw contributions (without earnings) at any time without paying taxes or penalties.

A custodial Roth IRA is a tax-advantaged retirement savings account that you can open on your child’s behalf if they have earned income. The primary purpose of a Roth IRA is long-term retirement savings, but it also offers some flexibility for other qualified expenses.

How to Open a Custodial Roth IRA

If a custodial Roth IRA sounds like a good addition to your plans for your child, the first step is choosing a financial institution to work with. Different banks or brokerage firms may offer options with varying fees or investment structures for long-term growth, so do your research to find an account that feels right for you. You might want to speak with your financial professional if you have questions about documenting your child’s income or planning your financial strategy for their future.

You’ll need your child’s personal information on hand, including their Social Security number and documents to prove their earned income. Work with your chosen provider to open the account and ensure it’s set up to follow any applicable rules from the IRS. You’ll have control over investments in the account, so you can select a mix of investments such stocks, bonds or mutual funds based on account options, your own risk tolerance and the amount of time before you expect your child to use the money.

Custodial Roth IRA vs. UGMA Account: Which Is Right For You?

Investments for your child can become a valuable resource they can draw on when they reach adulthood. There are advantages and disadvantages to any option. You might split contributions between multiple types of accounts, or you might prefer to focus on the account that aligns better with your plans and goals.

Penalty-free flexibility: UGMA account

Your little one may want to be an astronaut-singer-marine biologist now, but their plans may change in lots of unexpected ways by the time they grow up. Your goal may be to give them as much flexibility as possible to use money to fit their needs.

A Roth IRA does offer certain helpful exceptions to use money without penalties before age 59½. But if you want more flexibility, a UGMA/UTMA custodial account doesn’t set any restrictions over how your child can or can’t use the money, once they hit the age of majority (typically 18-21, depending on the state).

Investing as early as possible: UGMA account (usually)

Technically, there is no age limit on when you can open a Roth IRA. Realistically, however, most babies and toddlers aren’t earning income, and therefore aren’t eligible for Roth IRA contributions. Investing when your kids are as young as possible can offer the longest time horizon to take advantage of potential earnings. A kids investment account can help you get a head start before your kids earn money.

Tax-advantaged growth: Custodial Roth

A Roth IRA offers more potential for tax-free growth and distributions. If your priority is tax-advantaged growth over a long timespan (and your child is willing to be patient), this might be a good account type to consider. A UGMA/UTMA account offers some tax advantages, but you will still need to pay taxes on gains over the exemption limit.

Maximizing financial aid: Custodial Roth IRA

The FAFSA recently released new, simplified rules, but it’s hard to predict what other financial aid rules may change by the time today’s kindergartners are ready to apply to college. For now, money in a child’s investment account can factor into financial aid calculations. By contrast, retirement accounts don’t currently count on a FAFSA, so a Roth IRA won’t reduce financial aid eligibility.

You might want to consider the advantages and disadvantages of how various accounts line up with your plans.

No caps on contributions: UGMA account

Taking small actions and giving investments time to grow is a great habit. Any amount you put toward your child’s future counts.

Some families may wish to make larger contributions. Or other relatives may want to pitch in, so contribution limits can be a potential consideration. If you open a Roth IRA for your child, the max total between all contributors is the lesser amount of your child’s earnings or $7,000 (in 2025). If your child earns $2,600 at a summer job and has no other income, that’s the maximum you can match in a Roth IRA for the year. Depending on your goals, you may want to consider choosing (or adding) a kids investment account to the mix so you can make higher contributions.