Can a Minor Have a 401k? Retirement Plan Options

A 401(k) plan is a widely recognized retirement savings vehicle in the United States. These plans offer individuals a structured way to save for their future, often benefiting from employer contributions and tax advantages. However, a minor cannot directly establish or contribute to a 401(k) plan. This is because 401(k)s are employer-sponsored benefits tied to specific employment relationships.

Eligibility for a 401(k) Plan

Eligibility for participation in a 401(k) plan is directly linked to employment with a company that provides such a plan. To be eligible, an individual needs to be a W-2 employee, indicating a formal employment relationship where taxes are withheld by the employer. Employers offering 401(k) plans set specific criteria that employees must meet before they can enroll.

These criteria include age minimums and service requirements. For instance, the Internal Revenue Service (IRS) allows plans to require employees to be at least 21 years old and to have completed one year of service. A year of service is defined as completing 1,000 hours of work within a 12-month period. Some employers may choose to have more lenient age requirements, but 21 years is a common standard.

Legislative changes have expanded eligibility for certain part-time employees. Starting in 2025, 401(k) plans must allow long-term part-time employees to make elective deferrals if they complete 500 hours of service for two consecutive years. Despite these expansions, many minors engage in informal work, such as babysitting, lawn care, or freelance activities, which are not associated with employers offering 401(k) plans. Even part-time jobs commonly held by minors, like those in retail or food service, may not offer 401(k) access, especially if the minor does not meet the plan’s age or hours-worked thresholds.

Retirement Savings for Minors

While a 401(k) is not an option for minors, they can begin saving for retirement through other options. Individual Retirement Arrangements (IRAs), particularly Roth IRAs, are a suitable alternative. Unlike 401(k)s, IRAs are not tied to employer sponsorship; instead, eligibility depends on an individual having “earned income.”

Earned income for a minor includes taxable wages, salaries, tips, and income derived from self-employment activities. Income from jobs like babysitting, dog walking, or mowing lawns can qualify a minor to contribute to an IRA.

There are two primary types of IRAs: Traditional and Roth. For minors, a Roth IRA is the more advantageous choice. Contributions to a Roth IRA are made with after-tax dollars, meaning the money grows tax-free, and qualified withdrawals in retirement are also tax-free. Most minors are in low tax brackets, so paying taxes on their contributions now can be more beneficial than deferring taxes, as their income and tax rates are likely to be higher in retirement.

A minor cannot directly open and manage an IRA; instead, it must be opened as a “custodial IRA.” This account is legally owned by the minor but is managed by an adult custodian, typically a parent or legal guardian, until the minor reaches the age of majority. The custodian makes investment decisions and oversees the account.

Opening and Contributing to a Custodial IRA

Establishing a custodial IRA for a minor involves steps. Many financial institutions, including major banks, brokerage firms, and investment companies, offer custodial IRA accounts. When selecting an institution, it can be convenient to choose one where the parent or guardian already has accounts, potentially simplifying management.

To open the account, information is required. This includes the minor’s Social Security number and the custodian’s Social Security number. Details regarding the minor’s earned income for the year are also necessary to ensure compliance with contribution rules.

The appointed custodian assumes responsibility for managing the investments within the account. This oversight continues until the minor reaches the age of majority, at which point control of the account formally transfers to the now-adult child. The age of majority varies by state, commonly being 18, but in some states, it can be 19 or 21. The custodian has a fiduciary duty to manage the account in the best interest of the minor.

Contributions to a custodial IRA are subject to rules. The total amount contributed each year cannot exceed the minor’s earned income for that year or the annual IRA contribution limit set by the IRS, whichever amount is less. For 2025, the IRA contribution limit is $7,000. While the contributions must be tied to the minor’s earned income, the funds themselves can come from anyone, such as parents or grandparents, as long as they are made on behalf of the minor.

Making contributions involves direct deposits or electronic transfers into the account. Given the long-term nature of retirement savings for a minor, investments within the custodial IRA are geared towards growth. This long investment horizon allows for a more aggressive investment strategy, focusing on assets with higher growth potential. Contributions to a Roth IRA can be withdrawn tax-free at any time. Earnings may also be withdrawn tax and penalty-free for specific qualified expenses, such as a first-time home purchase or higher education, after the account has been open for five years.