The ultimate gift for kids: A Roth IRA?

Whether it's for a graduation, birthday or the holidays, parents often wonder whether opening a child's first IRA could be a smart gift. And the answer is yes: Gifting funds for a Roth IRA is a great way to give your loved ones a head start on building a fund for their retirement and a tangible way to demonstrate how money can work for you.

Of course, your kid probably doesn't have "retirement savings" at the top of their wish list, but the earlier you save, the more impactful those first contributions could be. For example, if you give $7,000 and the account grows 8% a year, it could double to $14,000 in less than nine years. And in 45 years? It could be worth over $250,000.

Why gift a Roth IRA?

You can open either type of IRA for your child – Roth or traditional. But for most people, Roth makes much more sense. After all, your child probably won’t see huge benefits from a tax deduction at the moment but imagine how much tax-free withdrawals could mean to them in 50 years. As long as your child waits to withdraw until they are at least 59 ½ years old, they’ll avoid penalties and make the most of that tax-free advantage.

Do they have to use the Roth IRA for retirement?

Roth IRAs are primarily designed for retirement savings, but they offer more flexibility than you might expect. In fact, there are several circumstances under which your child can access the funds before reaching retirement age without incurring penalties.

For instance, if they decide to purchase their first home, Roth IRA rules allow them to withdraw up to $10,000 penalty-free for this purpose. Additionally, funds can be used to cover higher education expenses, medical expenses that exceed a certain percentage of their adjusted gross income and certain other qualifying life situations.

Given this flexibility, a Roth IRA can serve as a versatile financial tool, balancing long-term saving goals with potential short-term needs. It's important, however, to understand the specific IRS rules that apply to early withdrawals to avoid unexpected taxes or penalties.

How gifting a Roth IRA works

If your child is a minor

The IRA will be what's known as a custodial account. It will be in your child’s name and will have a designated custodian (typically you or another parent) to oversee it. For instance, you would do all the investing of the assets in the IRA.

You probably won't be able to start an IRA for your 10-year-old – because your child must have earned income to open an IRA, just like an adult. You can match the money they earn scooping ice cream, waiting tables or folding clothes at the local mall and use it to open the IRA, but you can't contribute more than they earn. In 2025, the contribution limit for all IRAs including custodial IRAs is $7,000.

While you might act as the custodian of the account, note that you won't have access to the money anymore; it belongs to your child. And once your child turns 18, they’ll take full control of the account.

If your child is an adult

You can't open an IRA on behalf of your adult child, but you can gift them the money they use to open one. As with a custodial IRA, they must have at least as much earned income as the amount of the contribution.

Transferring an existing IRA to your child

You generally can't transfer ownership of a Roth IRA to someone else while you're alive (the exception being in cases of divorce). It must remain in your name.

You can certainly name your child as a beneficiary to inherit your IRA after you pass away, of course. Inherited IRAs have special distribution rules; your child wouldn’t need to (or be able to) wait for retirement to withdraw the money.

You can also theoretically withdraw money from your own IRA and give it to your child to open their own. But unless you’re already over age 59½ , that's likely to have negative tax consequences and we generally wouldn't recommend it. And even if you’re over age 59½, you don’t want to sacrifice retirement savings you might need!

Gifting an IRA as a tax strategy

Gifting or transferring your existing IRA to your child to avoid paying taxes on it won't work because gifting and transferring IRAs is not allowed.

But here's the good news: As long as you meet the requirements, your withdrawals from your Roth IRA will be tax-free in retirement anyway. So, you don't need to worry about tax minimization strategies for your Roth.

What about traditional IRAs?

If you have a traditional IRA, you might be wondering what you can do to lower your tax burden there. As with a Roth, you can't gift or transfer a traditional IRA. But if you're at least age 70½, you can make charitable donations from your IRA as a "qualified charitable distribution" and that money won't be included as income for you (Of course, the money needs to go to a charity, not to your child).

Gifting from other accounts

You can also gift money from your nonretirement accounts to your children, of course. Just note that any amounts over the annual limit ($18,000 in 2024) must be reported on your tax return and you may need to pay gift tax if the total lifetime amount exceeds the limit. This won't help lower taxes on your IRA, but it will reduce your estate and therefore your overall tax burden.

A gift that will keep on giving

Gifting a Roth IRA is a great way to help your loved ones save for the future. Make sure to follow the rules and consider talking to a financial advisor.

Neither Edelman Financial Engines nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from your qualified tax and/or legal professionals to help determine the best options for your particular circumstances.