The custodial Roth IRA has been on the books since the Roth IRA itself was created in the 1997 Taxpayer Relief Act, but the structure has gained meaningful traction with high earning families over the last three years as state earned income compliance has gotten cleaner and as more family run businesses have moved their bookkeeping onto modern payroll software. The setup works simply. A minor with documented earned income from W-2 wages or self employment can contribute up to the lower of their earned income or the annual Roth contribution limit, which for 2026 is $7,000. The account is technically held in custody by a parent or other adult until the minor turns 18 or 21 depending on state law, then transitions to the minor's full control.
The compounding math on a custodial Roth started early is the part that makes the structure so attractive when the family situation supports it. A child who contributes $7,000 each year from age 13 through age 22 has put in $70,000 of basis. At a 7 percent real return, that account is worth roughly $98,000 at age 22, $390,000 at age 40, and $1.55 million at age 60, all tax free at withdrawal. No subsequent contribution is required after age 22 to reach those figures. The basis itself is always available for withdrawal without tax or penalty, which means the account also functions as a long horizon emergency fund or a flexible reserve for a first home.
The earned income piece is the threshold issue. The IRS requires that the child have actual W-2 wages from an employer, including a family member's business, or net self employment income from a real activity. The activity must be age appropriate and reasonably compensated for the work performed. Mowing neighborhood lawns at age 13 for $1,500 over a summer is fine and the IRS has accepted this kind of self employment income for decades. Cleaning a parent's office, filing paperwork, modeling for marketing photos, social media management for the family business, and similar activities all qualify when documented properly.
Compensation has to be at fair market value for the work done. The IRS audits family business compensation more aggressively than most other small business compensation areas, and the documentation expectation is the same as for any other employee. Time logs, written job descriptions, hourly or per project rates that match local market rates, and an actual paycheck flow through a payroll provider are the four pieces that hold up under scrutiny. Gusto and ADP are the two most common payroll platforms used for family business minor employees because they generate the W-2 and handle the federal and state withholding correctly. The cost runs $40 to $80 per month for a single employee setup.
Tax treatment for the family side is meaningful. The wages paid to a child under 18 by a parent's sole proprietorship or single member LLC are exempt from FICA and FUTA payroll taxes per IRC sections 3121(b)(3)(A) and 3306(c)(5). The wages are deductible by the business as ordinary compensation expense. The child's first $14,600 of wages in 2026 falls within the standard deduction and creates no federal income tax liability at all. The combination of a deductible expense to the parent's business and zero federal tax for the child means roughly $4,000 to $5,000 of total family tax savings for a $14,600 wage paid to the child, separate from the Roth contribution itself.
State tax treatment varies. Tennessee and Texas have no state income tax, so the wage to the child carries no state tax burden either. California, New York, Massachusetts, and twelve other higher income tax states do not exempt the wages from state income tax even when they are exempt federally, although the state standard deduction usually absorbs the wage. Working with a qualified CPA to confirm the state treatment before setting up the structure is the typical recommendation.
Brokerage selection has become straightforward. Fidelity, Schwab, and Vanguard all offer no fee custodial Roth IRA accounts with no minimum balance requirements. Fidelity's minor account product was simplified in 2024 to a single online application that takes roughly 20 minutes for a parent to complete with the child's Social Security number and the bank account routing for funding. The custodial account holder, typically a parent, has full control over investment decisions until transition. Most families use a single low cost target date fund or a three fund index portfolio for simplicity.
The custodial Roth structure is not the right fit for every family. Households with no family run business and no realistic earned income stream for the child do not have the qualifying income piece. The structure also requires real work and real money flow, which is not always desirable for parents who would prefer the child focus on school. For families that already have a business and a child of working age, the math is rarely close. A decade of $7,000 contributions starting at age 13 is the difference between retirement at 55 and retirement at 70 for many households who run that math.