Roth IRAs for Your Kids: The Tax Planning Move You Haven’t Made Yet

Do you remember your first “job”? Maybe it was a lemonade stand, or perhaps you were the neighborhood lawn mower. You probably earned enough for a candy bar and a comic book.

Today, the stakes and the opportunities are higher. While most physicians focus on their own 401(k)s and backdoor Roths, many overlook a tax planning vehicle sitting right at the kids' table: the Custodial Roth IRA.

It’s not just a piggy bank 2.0. It's a way to build generational wealth and teach financial literacy before your kids can even drive.

What is a Custodial Roth IRA?

A Custodial Roth IRA is simply a Roth IRA that an adult (you) opens for a minor (your child). You manage the assets, making investment decisions and handling contributions, until your child reaches the age of majority (usually 18 or 21, depending on your state).

At that point, the account transfers to them. But until then, you control the investment decisions. You control the investment decisions until your child reaches the age of majority (18 or 21, depending on your state), then the account transfers to them.

The Golden Rule: Earned Income

Here is the catch: Your child cannot contribute allowance money or birthday cash from Grandma. To contribute to a Roth IRA, the account holder must have earned income.

The IRS defines earned income as taxable wages or income. This usually comes from:

• W-2 employment (summer jobs, lifeguarding, retail).

• Self-employment income (babysitting, dog walking, lawn care).

This is where the physician advantage kicks in. If you own a private practice, you can potentially hire your children to perform legitimate work for your business (filing, shredding, cleaning, social media management) by paying them a reasonable wage:

1. You get a business tax deduction for their wages (reducing your high-bracket taxable income).

2. They earn income to fund their Roth IRA.

3. They likely pay $0 in federal income tax because their earnings are often below the standard deduction ($16,100 for single filers in 2026).

That's three tax benefits from one paycheck.

Contribution Limits for 2026

For the 2026 tax year, the Roth IRA contribution limit is $7,500 (or the total amount of your child's earned income, whichever is less).

Scenario A: Your teen earns $3,000 lifeguarding. They can contribute up to $3,000.

Scenario B: Your teen earns $10,000 working in your practice. They can contribute the maximum $7,500.

Note: You, as the parent, can fund the account with your own money, provided the contribution doesn't exceed the amount of money the child actually earned that year.

Why Start Now? The Power of Compounding

Albert Einstein reportedly called compound interest the "eighth wonder of the world". He wasn't wrong. Time is the one asset your children have in abundance.

Let’s look at the math:

• If you max out a Roth IRA ($7,500) for your child just once at age 15...

• And that money grows at a hypothetical 7% annually...

• By age 65, that single contribution could grow to roughly $220,000.

That is entirely tax-free money. No taxes on the growth, and no taxes on the withdrawal in retirement. If you contribute annually, the numbers become staggering.

Flexibility: Not Just for Retirement

You might be thinking, "My 10-year-old doesn't care about retirement." 

However, Roth IRAs are more flexible than most physicians realize:

• Contributions are always accessible: Your child can withdraw the principal (the money put in) at any time, tax-free and penalty-free.

• College Expenses: Earnings can be withdrawn penalty-free (though taxes may apply) for qualified higher education expenses.

• First Home Purchase: Up to $10,000 of earnings can be withdrawn tax-free and penalty-free for a first-time home purchase (subject to the 5-year rule).

How to Open a Custodial Roth IRA

1. Choose a Custodian: Most major brokerages (Fidelity, Schwab, Vanguard) offer Custodial Roth IRAs.

2. Gather Documents: You will need your child’s Social Security number and your own identification.

3. Fund the Account: Link your bank account and make the contribution.

4. Invest: Work with your fax team to select an investment allocation that fits your goals.

If you have children with earned income, or if you own a practice and want to explore hiring them, let’s ensure it is done correctly.

Disclaimer: This material is intended for educational and informational purposes only and does not constitute tax, legal, accounting, or financial advice. The content is general in nature and may not apply to your specific circumstances. Tax laws and financial regulations are subject to change and interpretation, and the application of these laws can vary based on individual situations. Before making any decisions, you should consult with a qualified tax advisor, legal counsel, or financial professional.

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