When a child starts earning money, the best first step is to help them decide what to do with it—not to rush into an investment account. Set aside time to talk about spending and saving, keep clear records of work and payments, and choose an account only after you know the goal, the child’s eligibility, and who should control the money.
This guide covers U.S. federal rules and general account choices. State laws and tax treatment can differ, and a child’s tax filing responsibilities depend on the tax year and type of income.
Start with a conversation and a simple plan
Children learn about money partly by watching how adults handle it. The Consumer Financial Protection Bureau notes that children are “constantly watching and listening,” and identifies allowance and jobs for family or others as possible ways young people earn money. Its guidance supports a parent-led conversation, not a promise of any particular financial outcome. CFPB: Teenagers and young adults | Money as You Grow.
Try this family exercise: ask your child to name one thing they might want to buy soon and one longer-term goal they would like to save toward. Decide together how much to keep available for spending and how much to save. A kids money management workbook or savings tracker can make those choices easier to follow, but it is optional; the useful part is the conversation and the habit of checking in.
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Keep records of what the child earns
Money earned by performing services is generally the child’s income for U.S. federal tax purposes, even if a parent receives the money or local law gives the parent rights to it. The IRS states: “Amounts a child earns by performing services are included in the child’s gross income and not the gross income of the parent.” IRS Publication 17 (2025), Your Federal Income Tax.
Keep a straightforward record of the work performed, dates, payer, amount, and payment method. This can help the family understand what the child actually earned and support any tax or account questions later. Do not assume that chores, gifts, or an allowance automatically qualify as earned income for an IRA; what counts depends on the nature of the work and its documentation.
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A parent or guardian may have to file a return for a dependent child who cannot file, and may be liable if the child does not pay tax due. Filing requirements depend on the relevant tax year and income type, so check the current IRS rules rather than relying on a general income threshold.
Choose an account by goal, eligibility, and control
A child does not need an investment account just because they have started earning money. Saving and learning can begin with a simple plan. If the family wants an account, compare what the money is for, who owns or controls it, its tax treatment, and any restrictions before opening or funding one.
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|---|---|---|
| Custodial IRA, including a Roth IRA | Retirement investing for a child with earned income | Contributions cannot exceed the child’s earned income for the year or the applicable annual IRA limit. An adult custodian manages the account while the child is a minor, subject to account terms and state rules. |
| UTMA/UGMA custodial account | Investing assets held for a minor under a custodial arrangement | Ownership and the age when control transfers depend on applicable law. Check local requirements and financial-aid implications before funding. |
| 529 plan | Saving for qualified education expenses | Qualified-use rules apply. Compare plan fees, investment options, state benefits, and disclosures; state tax treatment can differ. |
| Parent-owned savings or investment earmark | A parent wants to retain control and decide later how to use or gift the money | The account belongs to the parent; tax and gifting consequences depend on the circumstances. |
FINRA’s overview of investing for children and Investor.gov’s introduction to investing explain account categories and basic considerations. Neither removes the need to check current account terms and applicable state rules. FINRA: Ways to Invest for Children; Investor.gov: Introduction to Investing.
When a custodial IRA may fit
A custodial IRA may be worth considering when a child has genuine earned income and the family wants to direct some of it toward retirement savings. FINRA says contributions cannot exceed the child’s earnings for that year; the applicable annual IRA contribution limit also applies. Because limits and rules can change, verify the current-year requirements before contributing.
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The money is intended for retirement, so this is not a flexible account for ordinary spending or a near-term goal. The adult custodian manages the account while the child is a minor, and account and state rules matter. Keep records that substantiate the child’s earnings, and do not treat gifts or chores as qualifying income without checking the rules that apply to the work.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.When a 529 may fit—and what its Roth rollover does not mean
A 529 is designed for qualified education expenses. It is operated by a state or an eligible educational institution and may offer tax advantages or other incentives for qualified education uses. Plan terms vary, and states can differ in whether they follow federal tax treatment. Review the particular plan’s fees, investment options, disclosures, and any state benefits before contributing. IRS: 529 Plans: Questions and answers.
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Some unused 529 funds may be eligible to move to the beneficiary’s Roth IRA, but this is a restricted option, not an unrestricted way to withdraw education savings. FINRA describes conditions that include the 529 account being open at least 15 years, excluding recent contributions and related earnings, staying within annual Roth IRA contribution limits, and the beneficiary having earned income. Confirm current official rules and the plan’s terms before relying on a rollover. FINRA: 529 Plans.
What to check before putting money into an account
- Goal: Is the money for spending soon, education, retirement, or a future gift?
- Eligibility: Does the child meet the account’s requirements, including earned-income rules for an IRA?
- Ownership and control: Who owns the funds now, who manages them, and when might control change?
- Taxes and restrictions: What are the federal and state consequences, and what uses are permitted?
- Costs and choices: What fees, investment options, and plan disclosures apply?
- Records: Can the family document earnings and contributions accurately?
For state-specific UTMA/UGMA transfer ages, financial-aid treatment, plan details, and a child’s tax filing obligation, verify the current rules for the family’s state and circumstances. These details cannot be settled for every family with a single account comparison.
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