Funding Grandchild's Roth IRA-A New Stretch IRA
Peak summer is now upon us—meaning that many young students have settled into summer jobs and reaping all the benefits that earned income provides. While the income from those summer jobs will prove valuable to those children in many ways, it also unlocks a future planning option that can create an incredible financial benefit further down the line. Earned income is the key to unlocking the Roth IRA savings option—and that can mean tips, wages from a summer job or even self-employment income from a side hustle. It's a planning opportunity that's often overlooked, given that Roth IRAs are typically retirement income vehicles and a minor child's retirement is decades in the future. As adult clients are considering their financial strategies this summer, they may be interested in exploring the Roth option for children and grandchildren who can benefit from decades of tax-free earnings—because Roth accounts can be funded from any source once the minor starts to earn income.
Custodial Roth IRAs: The Basics
While the IRS doesn't impose age restrictions on Roth IRAs, minor children cannot actually establish and manage a Roth IRA on their own. An adult will manage the account until the minor reaches the age of majority (typically, 18, but possibly up to 25 depending on the state). The adult acts as custodian and the minor is the account holder.
Once the child reaches the age of majority, the Roth account must be converted into a Roth IRA in their own name.
Establishing the custodial Roth IRA is fairly straightforward. You'll need the child's Social Security number and identification (both for the adult and child). The account can be opened in person or, often, online (depending on the provider). As always, it's also important to understand any fees that the financial institution charges.
After that, the account can be funded with up to $7,500 (in 2026) or the minor's earned income, whichever is less. The funding can come from any source, which makes the Roth vehicle ideal for lifetime gifting. The child can keep their summer earnings while a parent or grandparent matches them by depositing to the Roth IRA—the overall contributions simply cannot exceed the child's earned income for the year. Earned income is any taxable income earned by the child, including traditional W-2 wages from a summer job or even self-employment income earned mowing lawns or babysitting.
The Roth account itself is treated as any other Roth account—meaning that it's funded with after-tax dollars and withdrawn tax-free down the line.
Once the funds are transferred into the child's account, the transfer is irrevocable (i.e., the funds cannot later be transferred into an account for another individual). The deadline for contributions is April 15 of the following year (April 15, 2027, for the 2026 tax year).
Understanding the Benefits of a Roth IRA for Minors
Importantly, very few restrictions exist when it comes to withdrawing from the Roth IRA. Of course, it's beneficial to encourage the minor to allow the funds to grow for as long as possible. It's also possible that the child will need to access the funds to pay for college or cover a downpayment on a first home. Roth accounts can be accessed penalty and tax-free, assuming the account has been open for at least five years.
Perhaps the most persuasive reason to open a Roth IRA for a child or grandchild is the value of compound growth. When the account is properly funded and maintained, the value of the account's compounded growth--potentially over decades--can provide a powerful tool to jumpstart the younger generation's savings potential.
Starting a Roth IRA for a minor is also beneficial given changes that have occurred in the workforce in recent years. Young workers change jobs much more frequently when compared with older generations. Many work in freelance or self-employment positions. Both of these factors can mean that retirement savings options go overlooked. Starting the child on a solid path toward savings can make the challenges they'll experience less financially painful.
From the adult's perspective, funding a Roth IRA is a powerful lifetime gifting and estate planning strategy. The annual contributions are shielded by the annual gift tax exclusion ($19,000 in 2026). The contributions are also then removed from the adult's taxable estate.
Funds within the Roth IRA aren't counted when determining whether the child is eligible for financial aid (a standard brokerage or other taxable account would be considered in financial aid determinations).
Conclusion
Roth IRAs can give children and grandchildren a valuable jump start when it comes to savings—and it can also be used as a powerful reward for a strong work ethic. Clients looking for a way to transfer wealth to provide financial security for future generations should always be advised to consider the Roth option. Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.