Invest for Your Kids: Start a Custodial Account Early, Then Pay Them Into a Roth IRA

Here’s the most powerful number in investing for kids: $1,000 invested the day a child is born, earning 8% a year, is worth about $149,000 by the time they turn 65. Invest the same $1,000 when they’re 25 and it grows to about $22,000. Same money, same returns. The only difference is 25 extra years.

That gap is compounding. Every year, your growth earns its own growth, and the early years do the heaviest lifting because they get the most time. As a parent, time is the one thing you can give your child that they can never buy back later.

This guide covers the two moves that make the most of it: opening a custodial account as early as you can, and getting your child legitimately paid so they can fund a Roth IRA, the best tax deal a young person will ever get. We’ll cover how each works, the rules, the benefits and what to watch out for.

Why starting at birth beats starting at 25

Most people start investing in their late 20s or 30s, after college and the first few jobs. By then they’ve already given away the most valuable years of compounding. Starting a child early flips that around.

Take a simple plan: open an account at birth with $1,000, add $100 a month, and put in $500 a year from birthday and holiday gifts. Stop adding when they turn 18. That’s $31,600 in total. At 8% a year:

• At 21, when they take control, it’s about $89,000.
• At 65, if they leave it alone, it’s about $2.6 million (around $386,000 in today’s dollars after inflation).
• If the same $31,600 went in starting at 25 instead, it would reach about $385,000 by 65. Starting at birth is worth more than $2.2 million extra.

Those are estimates, not promises: markets don’t move in straight lines, and 8% is an assumption (the U.S. stock market has averaged roughly 10% a year over the long run, before inflation). But the shape of the curve is the point. The money that goes in first matters most.

Step one: open a custodial account (UTMA/UGMA)

A custodial account is a regular brokerage account held in your child’s name, with you (or another adult) managing it as the custodian until they become an adult. They’re called UTMA or UGMA accounts after the state laws that create them. Most big brokerages offer them, often with no minimum and no fees, and you can open one online in about 15 minutes with your child’s Social Security number.

How it works

• Anyone can contribute: parents, grandparents, aunts and uncles. It’s a great home for birthday money.
• It can hold almost any investment. For a child with decades ahead, a low-cost broad index fund (a total market or S&P 500 fund) is hard to beat.
• The money belongs to your child. Every dollar you put in is an irrevocable gift. You manage it, but you can only spend it for your child’s benefit, not on things you already owe them as a parent, like food and housing.
• They take control at the age your state sets, usually 18 or 21, and up to 25 in a few states.

Taxes, in plain English

Investment income in a custodial account is your child’s income, and the “kiddie tax” decides how it’s taxed. For 2026, the first $1,350 of a child’s investment income is tax-free, the next $1,350 is taxed at the child’s low rate, and anything above $2,700 is taxed at your rate. With buy-and-hold index funds, the only yearly income is usually a small dividend, so most families owe little or nothing for years.

Gifts are simple too: in 2026 each person can give each child up to $19,000 a year without filing a gift tax return. A married couple can give $38,000.

What to watch out for

• It becomes theirs. At 18 or 21 your child can do whatever they want with it. The best protection is teaching them along the way: show them the statements, explain what compounding is doing, and let them watch it grow.
• Financial aid. On the FAFSA, a custodial account counts as the student’s asset, which reduces aid more than a parent’s asset would. If college is the main goal, a 529 plan is usually the better home for that money: it grows tax-free for school, counts far less against aid, and since 2026 can also pay for K-12, trade schools, credentials and even a Roth IRA later. Many families use both. Our 529 College Savings Calculator shows how much of college your plan would cover.
• A newer option: Trump Accounts. Starting in 2026, children under 18 can have a Trump Account, a new kind of tax-advantaged account invested in low-cost U.S. stock index funds. U.S. citizens born from 2025 through 2028 can get a $1,000 government deposit (you open the account and claim it on IRS Form 4547), and families can add up to $5,000 a year, including up to $2,500 from an employer. Nothing can come out before 18; then it becomes the child’s traditional IRA, so the growth is taxed when it’s withdrawn. If your child qualifies for the $1,000, claim it, and see what it grows to with our Trump Account Calculator.

Step two: get your child paid, then open a Roth IRA

A Roth IRA might be the best account a young person can own. Money goes in after tax, grows for decades, and comes out tax-free in retirement. For a child who pays little or no income tax today, that’s close to a perfect deal.

There’s no minimum age. There’s just one requirement: your child needs earned income, meaning pay for real work. An allowance doesn’t count, gifts don’t count, and investment income doesn’t count.

The rules for 2026

• The contribution limit is whatever your child earned that year, or $7,500, whichever is lower. If they earn $3,000 from a summer job, up to $3,000 can go in.
• The money doesn’t have to be the same dollars they earned. Your child can spend their paycheck, and you can give them the money for the Roth contribution, as long as the total doesn’t exceed what they earned.
• You open it as a custodial Roth IRA. You manage it until they reach adulthood, then it becomes theirs.
• It stays flexible. What they contribute can come out at any time, tax- and penalty-free. Growth comes out tax-free after 59½ (once the account is at least five years old), with exceptions for things like up to $10,000 toward a first home.
• It doesn’t hurt financial aid. Retirement accounts aren’t counted as assets on the FAFSA.

What it can grow to

Say your child earns enough to put $5,000 a year into a Roth IRA from age 10 through 17. That’s $40,000 in total. At 8% a year, it could be worth about $2.1 million at 65, all of it tax-free. Wait until 25 to put in the same $40,000 and it reaches about $674,000. Starting at 10 is worth roughly $1.5 million more.

Legitimate ways to get your child paid

This is where most families get stuck. Your child needs real income, from real work, at a reasonable rate, with records to prove it. Here are the main routes.

1. A job or a small business of their own

From 14, most teens can work a regular job. Before that, plenty of work counts: babysitting, pet sitting, mowing lawns, tutoring, refereeing youth sports, selling crafts. If your child is self-employed and earns $400 or more in net profit in a year, they’ll need to file a tax return and pay self-employment tax on it. Either way, keep a simple log of who they worked for, when, and how much they were paid.

2. Hire them in your business

If you own a business, hiring your child can be one of the best tax moves available to a family:

• Your business deducts their wages, which lowers your taxable income at your tax rate.
• Your child likely pays no federal income tax. In 2026 a single filer’s standard deduction is $16,100, so a child can earn up to that much in wages without owing federal income tax.
• If your business is a sole proprietorship (or a partnership owned only by you and your spouse, or a single-member LLC taxed like one), wages paid to your child under 18 are also free of Social Security and Medicare taxes, and free of federal unemployment tax until 21.

An example: you pay your 15-year-old $7,500 for the year to help with real work in your business. If you’re in the 24% bracket, that’s about $1,800 less in federal income tax for you, your child owes no federal income tax on it, and all $7,500 can go into their Roth IRA. (If your business is an S corporation or C corporation, the payroll tax exemption doesn’t apply, but the deduction and the Roth IRA still do.)

What the IRS expects

Hiring your child is legal and common, but it has to be real. The IRS looks for three things:

• Real work. Tasks the business genuinely needs and that suit their age: filing, scanning, cleaning the office or shop, packing orders, social media, data entry, photography, helping at events. Some businesses pay children to appear in their marketing photos and videos; if you do, pay a rate similar to what you’d pay a model, and only for images you actually use.
• Reasonable pay. Pay what you’d pay someone else for the same work. $15 an hour for filing is believable; $50 an hour isn’t.
• Records. A short job description, timesheets, pay that actually moves into an account in your child’s name, and a W-2 at year end. Treat it like any other employee.

Also check your state’s child labor rules and any state payroll requirements, which can differ from the federal ones. Chores around the house don’t count as a business job.

Your checklist

• Get a Social Security number for your child (usually at birth).
• Open a custodial account and set up an automatic monthly investment, even if it’s small. Point family gifts to it.
• Check whether your child qualifies for a Trump Account and the $1,000 deposit (IRS Form 4547).
• If college is a goal, open a 529 and point grandparents’ gifts there.
• Once your child has earned income, open a custodial Roth IRA and contribute up to what they earned (max $7,500 in 2026).
• If you hire them, write down the job, track their hours, pay a reasonable rate into their own account, and issue a W-2.
• Keep everything: timesheets, pay records, tax returns and contribution receipts.
• Bring your child in. Show them the account a few times a year. The habit is worth as much as the money.

Run your own numbers with our free Custodial Account Calculator, Roth IRA for Kids Calculator and Teen Account Calculator, plus the 529 College Savings and Trump Account calculators. They’re all in the Parents Hub.

Tax rules change, and every family is different. This is education, not tax or legal advice. Before hiring your child or opening accounts, check the details for your situation with a tax professional.

Paycheck Paradox is reader-supported. Some of the products and services we write about pay us a commission when you click through or sign up — this never influences our reporting, and our opinions are always our own. We are not licensed financial advisors, and nothing here should be taken as personalized investment advice.