How to Create Generational Wealth: Roth IRA Edition
Generational wealth is the kind of money that sticks around. And your kids can be the first generation to inherit wealth with smart, consistent moves over time — like investing early in your kid’s future.
If you can do any kind of savings for your child, a Roth IRA is one of the best investment options for your children’s future. Although the world “retirement” is in the name, you can use a Roth IRA to save for college, buy a home, and more. Plus, thanks to the magic of compound growth, even modest, consistent contributions can grow into a six-figure gift by the time they hit 18.
If you’re serious about giving your kid a financial head start, here’s the breakdown of why a Roth IRA beats out other options like 529 plans or custodial brokerage accounts — and why you don’t need to be rich to make it happen.
In this article:
What’s a Roth IRA?
Why Choose a Roth IRA Over Other Options
Roth IRA Growth: The Big Picture
How to Open a Roth IRA for Your Child — Yes, Even if They’re a Baby
Step 1: Your Child Needs to Earn Income’
How Business Owners Can Hire Their Kids (and Save on Taxes)
Step 2: Opening the Custodial Roth IRA
What’s a Roth IRA?
A Roth IRA is a tax-advantaged account where you contribute after-tax dollars. With a Traditional IRA, Uncle Sam offers a tax deduction equivalent to your contributions but takes a cut when you withdraw in retirement. With a Roth IRA, you’ve paid taxes upfront so everything you withdraw — including any investment gains — is 100% yours.
So why does this matter for your kid? Because they’re young. They don’t need tax breaks now; they’re in a low (or zero) tax bracket now, so paying taxes upfront is painless. When they retire, they’ll be thanking you for setting them up with tax-free money.
The biggest benefit of starting a Roth IRA early is that their money has decades to grow tax-free. When that investment snowball effect starts, it’s like handing your kid a time machine to future wealth. And here’s the best part: you can pull out your contributions anytime, penalty-free, which makes it flexible as hell.
Why Choose a Roth IRA Over Other Options
529 plans and custodial brokerage accounts are solid options for parents looking to save for their kid’s future. They’re easy to set up and have fewer barriers to entry.
529 plans offer state tax benefits and penalty-free withdrawals for qualified education expenses They are great if you’re 100% sure your kid will go to college. Traditionally, the money had to be used for exclusively education expenses (or you’ll get hit with penalties). So, if your kid decided to skip college or didn’t need the full amount, you were stuck.
But the Secure 2.0 Act in 2024 changed the rules. Beneficiaries can roll over up to $35,000 into a Roth IRAin their name (not the original 529 account holder’s name) provided:
The 529 account must have been open for more than 15 years.
Funds cannot be rolled into a Roth IRA until 5 years after the funds were contributed or earned.
A custodial brokerage account is another option. Custodial accounts for minors give your kid flexible access to funds. But the IRS loves to ruin a good time, and the "kiddie tax" is their way of making sure parents don’t game the system.
In custodial brokerage accounts, any unearned income your kid racks up over a certain limit gets taxed at your tax rate, not their lower one. Why? Because the IRS doesn’t want you parking your income-generating assets in your kid’s name to snag a sweet tax break.
So, while the account technically belongs to your child, once the gains hit that magic number, Uncle Sam swoops in and says, “Nah, we’re taking the grown-up cut.” When your kid turns 18 (or 21 in some states), they become the legal accountholder and are responsible for paying the taxes.
A Roth IRA provides more long-term advantages:
Tax-free growth
Penalty-free withdrawals on contributions
Flexibility to use the funds for anything from college to retirement to putting a down payment on a house.
Think of 529s and custodial accounts as good options — but a Roth IRA is a versatile, wealth-building tool. Check out Tax Tips to Help You Survive 2025 for more on common tax questions about different accounts, capital gains, and that magical trick called tax-loss harvesting.
Roth IRA Growth: The Big Picture
So how much money can you save for your child in a Roth IRA? The earlier you begin, the more significant the growth thanks to time-amplified returns. I crunched the numbers to show growth acceleration over time. Let’s assume you max out annual contributions, which is $7,000 in 2025) and the annual return rate is 7% (a typical stock market return).
By the time your kid turns 18, your return on investment (ROI) could be:
102.11% if you start at their birth – that’s more than doubling your money!
53.53% if you start when they are 7 years old.
18.77% if you start when they are 14 years old.
Do you see how crucial those early years are? Even if you wait until they’re 7, you’ve already cut potential savings by more than half.
Want to see how steady contributions now can turn into a big monetary gift for your kid’s future? Download this chart to watch the numbers grow year by year — proof that starting early isn’t just smart; it’s downright life-changing.
How to Open a Roth IRA for Your Child — Yes, Even if They’re a Baby
Setting up a Roth IRA for your kid isn’t hard, but there’s a catch: your child must have earned income. You can’t just toss their birthday money into an account and call it a day. The IRS is picky about what counts as income, but if you know the rules, there are plenty of ways to make it happen — even for toddlers. Here’s what you need to know to get started and how entrepreneurial parents can turn this into a major financial win.
Step 1: Your Child Needs to Earn Income
To open a Roth IRA for your kid, the IRS requires that they have earned income. What counts as earned income?
Working in your family business? Absolutely.
Babysitting, dog walking, or lawn mowing? Yes.
Modeling gigs or social media sponsorships? Sure.
Chores around the house? Nope.
As long as it’s legitimate work, your kid qualifies to have a Roth IRA. Just remember to document everything, because if the IRS asks questions, you’ll want to be ready with proof.
How Business Owners Can Hire Their Kids (and Save on Taxes)
If you’re a freelancer, entrepreneur, or small business owner, you can hire your kid to work for your business, pay them a legitimate wage, and funnel that money into their Roth IRA. And guess what? That wage is a business expense for you — meaning you get a tax deduction, too.
Here’s how it works:
Hire your kid for tasks they can reasonably perform. Think product modeling for your website, helping with social media, filing papers, or cleaning your office.
Pay them a fair wage. The IRS expects wages to be reasonable for the work performed, so don’t pay your 5-year-old $100/hour for coloring a picture.
Document everything. Keep track of hours worked, tasks completed, and payments made. Treat them like any other employee to stay on the IRS’s good side.
The tax benefits?
You lower your taxable business income by paying your kid.
Your kid gets earned income that can go directly into their Roth IRA.
No payroll taxes if your business is a sole proprietorship or family partnership.
It’s a triple win: you save on taxes, your kid builds long-term wealth, and you’re keeping money in the family.
Step 2: Opening the Custodial Roth IRA
Once your kid has earned income, it’s time to open a custodial Roth IRA. Here’s how:
Choose a brokerage. Most major brokers like Fidelity, Charles Schwab, and Vanguard offer custodial Roth IRAs with low or no account minimums. We have Vanguard Roth IRA for minors and a Fidelity custodial brokerage account.
Provide documentation. You’ll need your child’s Social Security number and you may need proof of their earned income.
Start contributing. You can contribute up to $7,000 per year (in 2025) or the amount of their earned income — whichever is lower.
NOTE: It doesn’t matter who contributes to the account as long as your child has earned the income. If your kid earns $3,000 babysitting, you can contribute that $3,000 to their Roth IRA, even if they don’t put a dime of it in themselves.
