To fund a child's custodial Roth IRA, the child must have earned income from real work, and you must be able to prove it. Wages are documented with a W-2 or pay stubs. Cash and odd-job income needs a contemporaneous log of dates, hours, tasks, and who paid. The contribution cannot exceed what the child actually earned.
Key takeaways
- A custodial Roth IRA is only valid to the extent the child has earned income: wages or net self-employment earnings. Allowances, gifts, and investment income do not count.
- The 2026 contribution is the lesser of the child's earned income or the annual limit. The IRA limit increases to $7,500 for 2026 (those under 50).
- There is no minimum age, but the work has to be genuine and the pay reasonable for the job.
- Keep documentation that matches the income type: a W-2 for employment, a dated work log plus invoices for cash and odd jobs.
- If your child works in your own unincorporated business, wages to a child under 18 are exempt from Social Security and Medicare tax. This is powerful and heavily scrutinized, so the paper trail matters most here.
- This is audit-sensitive, higher-stakes territory. Confirm the specifics with a CPA before filing.
Why earned income is the whole ballgame
The IRS does not care that a Roth IRA is "for a kid." It cares whether a qualifying contribution was made, and a Roth contribution is only allowed up to the account holder's earned income for the year. For a minor, that means the child personally earned the money through work.
Earned income is wages, salaries, tips, and net earnings from self-employment. Unearned income is the disqualifier: allowances, birthday money, gifts, dividends, interest, and capital gains cannot support a contribution, no matter how much of it a child has. A teenager sitting on a $20,000 brokerage account but earning nothing from work can contribute $0 to a Roth IRA.
So if your child earned $3,000 babysitting and mowing lawns in 2026, that $3,000 is their contribution ceiling for the year, well under the $7,500 statutory limit. The money that goes into the account does not have to be the exact dollars they earned. A parent or grandparent can gift the cash to fund it, as long as the contribution stays within the earned-income figure.
What documentation to keep, by income type
Match your records to how the income was earned. The goal is a clear, contemporaneous trail you could hand to an examiner years later.
| Income type | What proves it |
|---|---|
| W-2 job (store, restaurant, employer) | W-2 form, pay stubs, offer letter or timesheet |
| Independent contractor / gig work | 1099-NEC (if issued), invoices, payment records, bank deposits |
| Cash odd jobs (babysitting, lawns, pet-sitting, tutoring) | A log with dates, hours, task, amount, and who paid; deposit records |
| Self-employment / small business | Schedule C, income and expense records, invoices, separate bank account |
| Wages from your own family business | Timesheets, a real pay rate, actual paychecks, a W-2, job description |
A dedicated bank account for the child helps everything. When earnings are deposited and contributions are traceable, the story tells itself. For self-employment and gig work, invoices do double duty: they document income and they teach the child how a business actually runs.
Note the filing thresholds. A dependent with net self-employment earnings of $400 or more must file a return and pay self-employment tax on Schedule SE, even when total income is small. Employment (W-2) income is treated differently and a return is often not required until earned income exceeds the dependent standard deduction, which for 2026 is the greater of $1,350 or earned income plus $450. Filing a return anyway, even when not required, creates a clean record that the income existed.
The family-business angle: real leverage, real scrutiny
Paying your own child through your business is where the strategy gets genuinely valuable, and where the IRS looks hardest. Two things have to be true.
The work has to be bona fide, and the pay reasonable. The child must actually perform legitimate work, and the compensation has to be what you would pay an unrelated person for the same job. Paying a 7-year-old $40,000 to "file papers" is the textbook way to lose the deduction and invite penalties. Age-appropriate work, a defensible hourly rate, timesheets, and actual paychecks are what hold up.
The payroll-tax treatment depends on your entity. Per the IRS, if your business is a sole proprietorship or a partnership in which each partner is a parent of the child, wages paid to your child under age 18 are not subject to Social Security and Medicare (FICA) taxes, and wages to a child under 21 are not subject to FUTA. That exemption disappears if the business is a corporation (S or C) or a partnership that includes a non-parent partner. In those structures, the child's wages are subject to income tax withholding, Social Security, Medicare, and FUTA regardless of age.
Done correctly, the child earns wages that fund a Roth IRA, the business deducts a legitimate expense, and modest earned income often falls under the child's standard deduction. Note that earned income is not subject to the kiddie tax, which only applies to a child's unearned income. Because the incentives are large and the abuse is well known, this is the part of the plan to run past a CPA before you file.
Common mistakes that get contributions disallowed
- Contributing more than the child earned. The excess is subject to a penalty until removed.
- Counting an allowance or gift as "income." It is unearned and does not qualify.
- No records for cash work. If it is not written down close to when it happened, it is hard to defend.
- Inflated pay to a family employee. Above-market wages read as a disguised gift, not compensation.
- Skipping the return when self-employment nets $400 or more. That filing is required.
Keep the supporting documents for as long as the account is meaningful, not just the standard three years. A contribution's validity can matter decades later when distributions are taken, so treat the earned-income proof as a permanent part of the child's Roth IRA file.
Where this fits in the bigger plan
A well-documented custodial Roth IRA is one of the highest-leverage moves available to a high-earning family, precisely because decades of tax-free compounding start early. It pairs naturally with the rest of your retirement planning and tax strategy work. For a sense of how early contributions stack up over time, see the median Roth IRA balance by age. And if your child needs a taxpayer ID to open the account, review opening a Roth IRA with an ITIN.
The mechanics are simple: genuine work, honest pay, and records you keep. Get those three right and the account does the rest.
This article is general information, not tax advice. Custodial Roth IRA funding, family-employment wages, and reasonable-compensation questions are fact-specific and audit-sensitive. Confirm your situation with a qualified CPA or tax advisor before filing.
Frequently asked questions
Can allowance or gift money fund a child's Roth IRA?
No, allowances, gifts, and investment income cannot support a Roth IRA contribution because they are unearned income. Only earned income qualifies, meaning wages or net self-employment earnings from real work. A teenager with a $20,000 brokerage account but no work income can contribute $0, since the contribution ceiling equals what the child personally earned that year.
How much can a child contribute to a Roth IRA in 2026?
A child can contribute the lesser of their earned income or the annual limit, which rises to $7,500 for 2026 for those under 50. If a child earned $3,000 babysitting and mowing lawns, that $3,000 is their ceiling. The money deposited does not have to be the exact dollars earned, so a parent or grandparent can gift the cash as long as it stays within the earned-income figure.
Do I have to file a tax return for my child's earned income?
It depends on the income type. A dependent with net self-employment earnings of $400 or more must file and pay self-employment tax on Schedule SE. W-2 income often requires no return until earned income exceeds the dependent standard deduction, which for 2026 is the greater of $1,350 or earned income plus $450. Filing anyway creates a clean record that the income existed.
Are wages paid to my child from my family business subject to payroll taxes?
It depends on your entity. If your business is a sole proprietorship or a partnership in which each partner is a parent of the child, wages to a child under 18 are exempt from Social Security and Medicare, and wages under 21 are exempt from FUTA. That exemption disappears if the business is an S or C corporation or a partnership with a non-parent partner.
How long should I keep the earned-income records for a custodial Roth IRA?
Keep the supporting documents for as long as the account is meaningful, not just the standard three years. A contribution's validity can matter decades later when distributions are taken, so treat the earned-income proof as a permanent part of the child's Roth IRA file. Match records to the income type, such as a W-2 for employment or a dated work log plus invoices for cash jobs.