Definition
A Roth IRA opened by a parent or guardian for a minor who has earned income, such as pay from a summer job or babysitting. The adult manages the account until the child reaches the age of majority in their state; contributions cannot exceed what the child actually earned, within the normal IRA limit.
Why it matters
Decades of extra compounding make a teenager's small contributions unusually powerful, and Roth contributions can be withdrawn without tax or penalty, which gives the account flexibility. It also builds the habit early, at the cost of some paperwork proving the income.
Example
A 16-year-old earns $3,000 lifeguarding and a parent contributes $3,000 to a custodial Roth IRA on their behalf, since contributions only have to match earned income, not come from it. Left alone at 7% growth for 50 years, that single $3,000 grows to roughly $88,000, all of it tax-free in retirement.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.