Custodial Roth IRA: A Smart Way to Start Saving for Your Child’s Future

Saving for a child’s future can sometimes feel overwhelming, especially when there are so many different types of accounts to choose from. A custodial Roth IRA is one option that parents may want to learn about, particularly if their child has started earning money.

When you compare ways to invest for a child, it can also be helpful to look at other options. Fabric by Gerber Life offers a UGMA investment account that allows parents and other adults to invest money on behalf of a child. Unlike a custodial Roth IRA, a UGMA does not require the child to have earned income.

So, what  is a custodial Roth IRA? It’s a Roth IRA opened for a child and managed by an adult until the child reaches the age when they can take control of the account. The child must have earned income to contribute. For example, money earned from a part-time job, babysitting, or another legitimate job may qualify.

One of the biggest reasons parents consider a custodial Roth IRA is time. A child who starts investing at a young age could potentially have many decades for their investments to grow. Roth IRAs can also offer tax advantages, since qualified withdrawals in retirement are generally tax-free. The IRS provides information about Roth IRA contribution rules⁠.

A custodial Roth IRA and a UGMA account also serve different purposes. A Roth IRA is designed primarily for retirement savings, while money in a UGMA can generally be used for a wider range of purposes that benefit the child. With a UGMA, the adult custodian manages the account until the child reaches the applicable age under state law.

If you’re trying to decide which option makes sense, FINRA’s guide to UGMA and UTMA accounts⁠ is another useful resource.

There isn’t one account that’s right for every family. A custodial Roth IRA may make sense for a child who has earned income and can start saving for retirement, while a UGMA may be worth considering for families who want a more flexible way to invest for a child’s future. Understanding how each account works can make it easier to choose an option that fits your family’s goals.