Why a Custodial Roth IRA isn’t always a good first step—and how to save the best for your newborn.
It’s never too early to start thinking about your child’s financial future, even after they’ve just arrived. Naturally, that leads to questions about investing early. If you’ve done any Googling, you’ve probably heard about Custodial Roth IRAs, and that might lead you to wonder: Can I open my newborn baby?
The answer is much simpler than yes or no. While there is no minimum age requirement to open a Custodial Roth IRA, there is one account rule that prevents many parents from opening one: your child must have earned income. Since most newborns don’t earn a paycheck (as lovely as that is), opening a Custodial Roth IRA is an option for many families in the early years of a child’s life.
That said, there are rare exceptions, but more importantly, there are several other effective ways to start saving for your child right now. In this guide, we will explain when to open this type of account for a newborn is something it’s possible—but also the best Custodial Roth IRA options if not.
TLDR: Under What Circumstances Can I Open a Roth IRA for My Newborn Child?
To contribute to any type of Roth IRA (custody or otherwise), the account holder must have income. This includes income earned from working, such as:
- W-2 wages from employer
- Self-employment income.
Items such as financial gifts from parents or relatives or investment income (such as dividends or interest earned) are not counted.
Although the thought of a newborn income sounds unappealing, technically they can earn money through modeling or commercial work.
This requirement is set by the IRS and applies regardless of age. Even if you can contribute to a Custodial Roth IRA on behalf of your child, contributions cannot exceed what your child actually earns (or the limit set by the IRS, whichever is lower).
Because of the constraints, it often makes more sense to start saving in different types of accounts first so that your money can grow long before your child starts earning money of their own.
Some Ways to Start Saving for a Newborn Baby
If a Custodial Roth IRA isn’t an option for you yet, don’t worry. Here are some of the more common options to consider:
Other Savings Account Options: UTMA/UGMA Accounts
UGMA and UTMA accounts are one of the most direct ways to start investing for your child early. With these savings accounts, parents can invest in their child’s name, no earnings required. Funds can be invested in stocks, ETFs, or mutual funds, giving the account the best potential for long-term growth beyond what a traditional savings account can provide. Unlike a Custodial Roth IRA, these savings accounts have no earned income requirements.
As with any savings option, this type of account has its disadvantages too:
- Financial aid eligibility: Assets held in a child’s name often weigh heavily in financial aid calculations, so this type of account may affect future financial aid when pursuing higher education. Parents often balance this with more academically oriented options.
- Account management: Once the child is old enough to have full control of the account, the guardian has no say in how the funds are used. While this is not a problem for some families, it can make things more difficult if parents feel that their child will need extra guidance.
Education Focused Savings Options: 529 Plans & Coverdell ESAs
If saving for education is a priority, 529 plans and Coverdell ESAs are designed to help you do just that. These accounts offer tax benefits when the funds are used for qualified educational expenses.
Although both options serve the same purpose, 529 plans are more commonly used because of their higher contribution limits and potential state benefits. If you’re sure that education will be a big expense, one of these accounts can be a powerful investment tool to help you get started early.
Options That Give Parents More Control: Trust Funds
For parents who want to maintain more control over how and when money is spent, keeping assets in your own name or setting up a trust may be a better fit.
Trust funds take this a step further by allowing you to set specific rules about how the money is distributed. Although they can be complex and expensive to set up, they provide a level of structure and control that other accounts do not. These options are generally more suitable for families who want to ensure that funds are used in a more targeted way rather than being automatically given in old age.
Best Short-Term Savings Options: High-Yield Savings Accounts
If you’re focused on short-term needs—upcoming childcare expenses, family expenses, or even building a small fund—a high-yield savings account is a good place to start. It’s a safe and effective way to grow your money while keeping it easily accessible when you need it.
Although they don’t offer the same long-term growth opportunities as investing, high-yield savings accounts play an important role in a well-rounded savings strategy. Many families use a high-yield savings account alongside investment accounts to balance stability and growth for both immediate needs and future long-term growth.
While a Custodial Roth IRA can be an incredibly powerful tool, it’s often not a realistic option for many newborns due to the need for capital gains. This early stage is a good time to explore other strategies that may be better suited to your current situation, and your goals.
Whether you choose a 529 plan, a savings account, or just start putting money away in a savings account, the most important thing is to develop healthy savings habits now so that your money has plenty of time to grow as your child grows.
