Unlock Your Child's Financial Future: A Comprehensive Guide to Opening a Vanguard Kids' Roth IRA
Hey there! Are you ready to give your child a head start on their financial journey? Imagine the power of compound growth working its magic for decades, turning small contributions today into a significant nest egg for their retirement. It might seem like a distant goal, but setting up a Roth IRA for a child with earned income is one of the most powerful and easy gifts you can give them.
And guess what? We're going to walk through this process together, step-by-step. Don't worry, it's not as complicated as it sounds. We'll break down everything you need to know to open a custodial Roth IRA at Vanguard, a company renowned for its low-cost index funds and ETFs. Let's get started!
Step 1: Determine If Your Child is Eligible
Before we dive into the nitty-gritty of the application process, let's make sure your child meets the key requirements. This is a critical first step.
Understanding "Earned Income"
The most important rule for a Roth IRA, for both adults and children, is that contributions can only be made with earned income. This isn't money from birthdays, gifts from grandparents, or investment dividends. It's money your child has received from working a job.
What counts as earned income?
Wages from a summer job, part-time work, or a weekend gig.
Income from self-employment, such as babysitting, lawn mowing, dog walking, or a freelance gig.
A W-2 from a formal employer.
Cash payments for odd jobs (as long as you can document it!). A simple log or notebook can be your best friend here. If your child earns $500 mowing lawns, you can contribute up to $500.
What does NOT count?
Allowances.
Gifts of cash from relatives.
Investment earnings.
Scholarships or grants.
Crucial Point: The amount you can contribute to the Roth IRA on your child's behalf cannot exceed their earned income for the year, nor can it exceed the annual IRS contribution limit. For the 2025 tax year, the total IRA contribution limit is $7,000 (or $8,000 for those age 50 or older). So, if your child earns $3,000, the maximum you can contribute is $3,000. If they earn $10,000, you can still only contribute the annual limit of $7,000.
Step 2: Gather Your Documents and Information
You'll be opening a custodial Roth IRA, which means you, as the parent or guardian, will be the custodian of the account, managing it on behalf of the minor. The account is legally owned by the child. To get this ball rolling, you'll need to have a few key pieces of information ready for both yourself and the minor.
Information for the Custodian (You):
Your Social Security Number or Taxpayer ID.
Your full legal name and date of birth.
Your current address and contact information.
Your bank account and routing number for funding the account.
Information for the Minor (Your Child):
Their Social Security Number.
Their full legal name and date of birth.
Their current address.
Proof of earned income (even a log or spreadsheet for self-employment income is a good idea to have on hand for your records).
Step 3: Open the Custodial Roth IRA with Vanguard
Now, let's get to the fun part! There are a couple of ways to open the account with Vanguard.
Option A: The Phone Call (Recommended for new clients)
This is often the most straightforward method, especially if you don't already have a Vanguard account.
Call Vanguard's customer service line: Dial 800-551-8631 during their normal business hours.
State your goal: Tell the representative that you want to set up a custodial Roth IRA for a minor.
Receive the link: They will likely provide you with a secure link to an online application to get the process started. Follow the prompts and fill out the required information for both you and your child.
Option B: Online Application (For existing Vanguard clients)
If you already have a Vanguard account, the process can be done from your existing login.
Log in to your Vanguard account.
Navigate to the "Transact" or "Open a New Account" section.
Look for the option to "Open a new account" and select "Retirement" or "IRA."
Follow the account wizard, making sure to select "Brokerage Roth IRA."
When prompted for the account owner, be sure to select "Minor" and enter your child's personal information. You will then identify your role as the custodian.
Double-check all the details! It's important to ensure the account is set up as a custodial Roth IRA for your child, not as a joint account or a regular brokerage account.
Step 4: Fund the Account
Once the account is opened and approved, it's time to contribute! You can typically do this by transferring money electronically from your linked bank account.
Initial Funding: You'll likely need to make an initial contribution to get started.
Contribution Limit: Remember, you can only contribute up to the lesser of your child's earned income or the annual contribution limit. For 2025, that limit is $7,000.
Ongoing Contributions: You can set up recurring contributions or make one-time deposits throughout the year. The deadline to contribute for a given tax year is typically the tax filing deadline of the following year (usually around April 15th).
Step 5: Choose Your Investments
This is where the real magic of long-term investing happens! With decades of compounding ahead, your child's Roth IRA has incredible growth potential. Vanguard is known for its excellent, low-cost index funds and ETFs. For a kids' Roth IRA, a simple, diversified approach is often the best.
Choosing a Strategy:
The "Set It and Forget It" Approach: Consider a Vanguard Target Retirement Fund. These funds are an excellent "all-in-one" solution. You simply choose a fund based on your child's expected retirement year (e.g., Vanguard Target Retirement 2070 Fund) and the fund automatically adjusts its asset allocation over time, becoming more conservative as the target date approaches. This is a fantastic, hands-off option.
The Diversified Index Fund Approach: If you prefer a more hands-on approach, you can build a simple portfolio with a few core funds. A popular and effective strategy is to use a combination of a total stock market fund and a total international stock market fund.
Vanguard Total Stock Market Index Fund (VTSAX): This mutual fund (or its ETF counterpart, VTI) gives you exposure to the entire U.S. stock market, from large to small companies. It's a powerhouse of diversification.
Vanguard Total International Stock Index Fund (VTIAX): To diversify globally, this fund (or its ETF counterpart, VXUS) invests in thousands of companies outside the U.S.
Other options: You can also explore Vanguard's S&P 500 index funds (VFIAX/VOO) for exposure to the 500 largest U.S. companies. For a more aggressive, growth-focused portfolio, you might consider a combination of a growth fund and a small-cap fund.
Important Note: The money in the account will initially be held in a settlement fund (like a money market fund). You, as the custodian, will need to select the investments and move the money from the settlement fund into the chosen mutual funds or ETFs.
Step 6: Manage and Educate
As the custodian, you're in charge of managing the account until your child reaches the age of majority (which varies by state, typically 18 or 21). You can continue to make contributions each year based on their earned income and guide them on the power of investing.
Teach them about compounding: Show them how their money is growing over time. A small amount invested today can become a massive amount in the future.
Involve them in the process: As they get older, show them the account statements and discuss the investments. This is a priceless financial education.
Ownership Transfer: When your child reaches the age of majority, the account legally transfers to their control. Vanguard will have a process for this, making the transition seamless.
By taking these steps, you're not just opening a retirement account; you're planting a seed that can grow into a lifetime of financial security for your child.
10 Related FAQs
How to determine the contribution limit for a kid's Roth IRA?
The contribution limit is the lesser of your child's earned income for the year or the annual IRS limit, which is $7,000 for 2025.
How to track a child's earned income for a Roth IRA?
Keep a simple log or spreadsheet with dates, the type of work performed (e.g., babysitting, lawn mowing), and the amount earned. For formal jobs, a W-2 or pay stubs are perfect.
How to know when the Roth IRA account officially transfers to my child?
The age of majority is determined by state law. It is typically 18 or 21. Vanguard will have a process to transfer the custodial account to a standard IRA in your child's name when they reach that age.
How to choose the best Vanguard fund for a kids' Roth IRA?
For simplicity and long-term growth, a Vanguard Target Retirement Fund is an excellent choice. For more control, consider a combination of a total U.S. stock market fund (VTSAX) and a total international stock market fund (VTIAX).
How to make contributions to the custodial Roth IRA?
Once the account is set up and linked to a bank account, you can make electronic transfers, set up automatic contributions, or send a check with a routing sheet.
How to withdraw money from a kids' Roth IRA?
Contributions can be withdrawn at any time, for any reason, tax-free and penalty-free. However, withdrawing earnings before age 59½ can lead to taxes and a 10% penalty, with a few exceptions like a first-time home purchase (up to $10,000).
How to handle a situation where a child has no earned income?
If your child has no earned income, they are not eligible for a Roth IRA. You could consider a custodial brokerage account (UGMA/UTMA) as an alternative for general investing, or a 529 plan for education savings.
How to educate my child about their Roth IRA?
Start with simple concepts like saving and investing. As they grow, show them the account balance and discuss how their money is growing. Explain the benefits of tax-free growth and the power of starting early.
How to find my child's Social Security Number?
If you don't have it on hand, you can find your child's Social Security Number on their Social Security card, birth certificate, or a previous tax return where they were listed as a dependent.
How to get help from Vanguard during the application process?
The best way is to call their customer service line at 800-551-8631. Their representatives are well-versed in the account opening process and can guide you through any hurdles.