How to Open a Custodial IRA for a Minor

A custodial Individual Retirement Arrangement, or IRA, is a retirement savings account established for a minor but managed by an adult. This adult, known as the custodian, is typically a parent or guardian who oversees the account until the child reaches the age of majority. These accounts allow a child’s earnings to be invested in assets like stocks, bonds, and mutual funds, offering the potential for compound growth over several decades. The primary purpose of a custodial IRA is to provide a tax-advantaged way for a minor to begin saving for the future.

Eligibility and Contribution Rules

The defining requirement for a minor to be eligible for a custodial IRA is having earned income. The Internal Revenue Service (IRS) defines earned income as taxable wages, salaries, tips, and other forms of employee compensation. This also includes net earnings from self-employment. There is no minimum age for opening a custodial IRA; even an infant can have one, provided they have legitimate earned income, such as from a modeling job.

For many minors, earned income comes from traditional part-time or summer jobs that issue a Form W-2, like working at a grocery store or a local restaurant. Income from self-employment, often referred to as “gig work,” also qualifies. Common examples for teenagers include babysitting, mowing lawns, dog walking, or tutoring. Allowances, cash gifts, and investment income do not qualify as earned income for the purpose of IRA contributions.

Once eligibility is established, contribution rules are straightforward. The amount that can be contributed to a minor’s IRA for any given year cannot exceed their total earned income for that year. Furthermore, contributions are capped by the annual IRA contribution limit set by the IRS. For 2025, this limit is $7,000 for individuals under age 50. For instance, if a teenager earns $3,000 from a summer job, the maximum that can be contributed to their IRA for that year is $3,000.

A parent, grandparent, or any other person can make contributions to the child’s custodial IRA, as the funds do not have to come directly from the minor’s own money. The contributions from all sources cannot surpass the minor’s earned income for the year. This allows adults to support a child’s savings goals, perhaps by matching their earnings, as long as the income requirement is met.

Choosing the Right Type of IRA

When establishing a custodial IRA, the custodian must choose between two primary types: a Traditional IRA and a Roth IRA. The choice centers on how contributions and withdrawals are taxed. Contributions to a Traditional IRA are often made with pre-tax dollars, meaning they could be tax-deductible, and the investments grow tax-deferred. Withdrawals made during retirement are then taxed as ordinary income.

In contrast, a Roth IRA is funded with after-tax dollars, so contributions are not tax-deductible. The benefit is that both the investment growth and the qualified withdrawals in retirement are completely tax-free. This distinction is important for a minor. Given that most children and teenagers are in a very low or even zero percent federal income tax bracket, the immediate tax deduction offered by a Traditional IRA provides little to no benefit.

For this reason, the Roth IRA is almost universally the more advantageous option for a minor. By contributing post-tax dollars while their income is low, they pay little to no tax on the front end. This allows them to take withdrawals in retirement, when they will likely be in a higher tax bracket, without owing any federal income tax on the distributions.

Required Information for Opening an Account

Before initiating the account opening process, the custodian must gather several key pieces of information for both themselves and the minor.

• For the minor, the financial institution will require their full legal name, date of birth, and Social Security number.
• The custodian must provide their own full name, Social Security number, and current contact information, such as a physical address and phone number.
• Documentation of the minor’s earned income is also required. If the minor has a job with an employer, a copy of their Form W-2 is standard proof.
• For self-employment income, such as from babysitting or lawn care, detailed records are necessary, like a ledger documenting the dates services were provided, a description of the work, and the payment received.

The Account Opening Process

The first step in the process is to select a financial institution that offers custodial IRAs. Many large brokerage firms, banks, and online investment platforms provide these accounts. When choosing an institution, compare factors like account fees, investment options, and the user-friendliness of their online platform.

Once an institution is chosen, the custodian will complete the custodial IRA application form. The custodian will enter their own information and the minor’s, specifying that the account is being opened under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).

After submitting the application, the final step is to fund the account. The most common method is to link an external bank account to the new custodial IRA and transfer funds electronically.

Managing the Account and Transfer of Control

After the custodial IRA is opened and funded, the custodian is responsible for managing the account’s assets. This involves making all investment decisions on behalf of the minor. The custodian acts as a fiduciary, meaning they must manage the account in the minor’s best interest. This includes selecting investments, such as stocks, bonds, or mutual funds, that align with a long-term growth objective suitable for a young investor.

The custodian’s control over the account continues until the minor reaches the age of majority. This age is determined by state law and is typically 18 or 21. At that point, the assets in the custodial account must be transferred to the beneficiary, who is now a legal adult. This process involves re-registering the account from a custodial IRA into a standard IRA in the individual’s own name.