What Is a Custodial IRA?

Here's what you should know about this type of account and its potential financial benefits.

Custodial IRA Defined

A custodial individual retirement account (IRA) isn’t complicated. It works much like an IRA you would open for yourself and follows the same contribution limits.

The key difference is ownership:

• Your child (or grandchild) is the beneficial owner.
• You, as the custodian, manage the account until the child reaches the age of majority (typically 18 in most states).

As the custodian, you’re responsible for decisions about how the money is invested and when distributions occur until your child is old enough to take control.¹

Custodial IRA Contribution Limits

The contribution limits match those of a traditional IRA you might hold for yourself. However, there are two key rules to keep in mind:

• Annual Limit: The 2026 IRA contribution limit is $7,500.²
• Earned Income Rule: Contributions can’t exceed the child’s earned income for the year.

Earned income includes taxable wages or money earned from working. It does not include gifts.

Potential Advantage of a Custodial Roth IRA

A custodial Roth IRA could make more sense than a non-Roth custodial IRA. The younger beneficial owner will have more time to grow their money and could earn more from their investments, which means that they could earn more tax-free income. Chances are that your child isn't earning enough to pay any income taxes, so a tax deduction that's potentially available for non-Roth IRA contributions may not be valuable.

Though you don't get a tax deduction for Roth IRA contributions, you instead get tax-free treatment on your original contributions, and on the earnings on those contributions, when you withdraw the funds at retirement (as long as the requirements for a Roth IRA are met).³

Teaching Your Child Good Financial Habits

A custodial IRA can help a child start saving early, but will they actually be willing to save some of what they've earned for a long-term goal like retirement? Some will and some won't. Even if the savings amounts are modest, helping a child develop the habit of saving regularly can be valuable. Plus, small savings today can help add up to a larger investment in the long-term.

Conclusion

It's never too early to start saving. Whether your child is putting money aside for retirement or another long-term goal, a custodial IRA could help them learn good financial habits and help their future financial well-being.

   A custodial IRA helps build a solid retirement foundation from a young age. Start Your Free Plan  

Sources

1. Individual retirement arrangements (IRAs). https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
2. 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500. https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500.
3. Earned Income and Earned Income Tax Credit (EITC) Tables. https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income-and-earned-income-tax-credit-eitc-tables#Earned%20Income.