Step-by-step setup without falling into hidden fee traps

You’ve paid your child legally through your family business.
Now you’re ready to supercharge their financial future.

One of the smartest things you can do is open a Custodial Roth IRA.
It’s simple, powerful, and nearly unbeatable for long-term compounding.

But most guides either overcomplicate it or miss the traps that families fall into — like getting stuck with high-fee accounts or filling out forms incorrectly.

Here’s exactly how we did it — step-by-step.

What Is a Custodial Roth IRA?

A Custodial Roth IRA is a retirement account opened by an adult (the custodian) for a minor child who has earned income.

It works like a normal Roth IRA except:

• The adult manages the account until the child reaches the "age of majority" (usually 18 or 21 depending on state law)
• The child is the real owner of the money
• Contributions grow tax-free
• Withdrawals in retirement are tax-free

It’s arguably the greatest legal tool for transferring generational wealth — because time + tax-free growth is a magic formula.

Requirements Before You Start

Before opening a Custodial Roth IRA, you must have:

• Documented earned income for the child (from legitimate work)
• Tax ID/Social Security Number for the child
• Custodian's ID (your driver's license, SSN, etc.)
• Initial funding source (usually your family business account or linked checking)

The amount contributed cannot exceed:

• The child’s total earned income for the year
• Or $7,000 (the 2024 contribution limit), whichever is less

Step-by-Step: Opening the Account

Choose the Right Provider

Look for:

• No account maintenance fees
• Low or no trading fees
• Access to simple investment options (index funds, ETFs)

Recommended providers:

• Fidelity (Fidelity Youth Account or Fidelity Roth IRA for Kids)
• Charles Schwab (Schwab Custodial IRA)
• Vanguard (good but slightly clunkier interface)

We personally used Fidelity — it was fast, clean, and fee-free.

Gather Documentation

Before starting the application, have ready:

• Child’s Social Security Number
• Child’s full legal name and date of birth
• Custodian’s Social Security Number and driver's license
• Address and contact information for both
• Custodian’s employment information (basic — not invasive)

Complete the Online Application

Go to the provider's Custodial Roth IRA application page.
Example: Fidelity's takes about 10 minutes.

Fill out:

• Custodian information first
• Child information second
• Funding source (checking account or bank link)

Designate initial contribution (even $100 to start is fine).

Fund the Account

• Link your business checking or personal checking account.
• Transfer the amount you want to contribute (documenting it carefully).
• Make sure the total contributions do not exceed the child's earned income for that year.

Tip: You can contribute throughout the year — it doesn’t have to be all at once.

Choose Investments

The money doesn’t grow unless you invest it.

Our approach:

• 100% into a low-cost total stock market index fund (like Fidelity's FSKAX or Schwab's SWTSX)
• One fund, low fees, no active management needed

Alternatives:

• Target-date retirement funds
• Split between total US stock market + international fund

Example Timeline

January–December:
Child earns $6,000 through family business.

Throughout the Year:

• Payroll logs kept
• Payments deposited into custodial checking or holding account

December–April:

• Open Custodial Roth IRA
• Contribute up to $6,000 (before April 15th of following year)

Note: You can contribute for the previous tax year until Tax Day.

Mistakes to Avoid

• Opening a taxable custodial brokerage instead of a Roth IRA by mistake
• Contributing more than the child earned — must match documented income
• Forgetting to invest the cash — an empty Roth just sits there
• Picking high-fee mutual funds instead of simple index funds

What Happens When They Turn 18 or 21?

At the age of majority (depends on your state):

• The account control transfers fully to your child
• It becomes their standard Roth IRA
• They can continue contributing, managing, or even withdrawing (under Roth rules)

Until then, you manage it — but it’s legally theirs.

Final Thought: This Is the Head Start Most Families Miss

If you pay your child $6,000/year for real work between ages 7 and 17, and invest it all in a Roth IRA?

At 7 percent annual return, it could be worth over $1 million by the time they reach retirement age — without them ever needing to add another dollar.

That's the real generational wealth hack — and it starts with a 10-minute account setup.

Next post: How we automate monthly contributions and teach young kids about investing early.

Disclaimer: The information provided in this post is for general educational and informational purposes only. It is not intended as, and should not be construed as, financial, legal, tax, investment, or other professional advice. You should consult with your own qualified advisors before making any financial decisions. We disclaim all liability for any actions taken based on the content provided.