Are you ready to give a child a head start on their financial future? Opening a custodial Roth IRA at Vanguard is an incredible way to do just that. Imagine the power of tax-free growth over decades! It’s one of the most powerful gifts you can give. This guide will walk you through every step, from eligibility to funding and choosing investments. Let's get started!
Step 1: Get to Know the Custodial Roth IRA and its Eligibility
Before you jump in, let's make sure this is the right account for you and the minor. A custodial Roth IRA is a retirement account opened by an adult (the custodian) for the benefit of a minor. The key takeaway is that the minor, not the custodian, owns the assets in the account. The custodian simply manages the account until the minor reaches the age of majority (typically 18 or 21, depending on the state).
Here’s the golden rule for eligibility: The minor must have earned income. This is the most crucial requirement.
What is "earned income"? Think of it as money they've earned from a job. This can be a W-2 job like a cashier at a grocery store, or income from a side hustle like babysitting, mowing lawns, or working as a freelance graphic designer. Allowance or gifts from family do not count as earned income.
Is there an age limit? No! As long as the minor has earned income, they can contribute, regardless of their age. A 10-year-old with a dog-walking business is just as eligible as a 17-year-old with a part-time job.
Are there income limits for contributions? Yes, just like a regular Roth IRA for adults, contributions are subject to Modified Adjusted Gross Income (MAGI) limits. For the 2025 tax year, the full contribution limit is phased out for single filers with a MAGI between $150,000 and $165,000. For married couples filing jointly, the phase-out range is between $236,000 and $246,000. So, while the child's earned income is the primary factor, if you are a high-income earner, you should be mindful of these limits.
Contribution Limits: For 2024 and 2025, the contribution limit for a Roth IRA is the lesser of the minor's earned income or $7,000 (or $8,000 if they're 50 or older, which is a consideration for the future!). This is the maximum you can contribute to all of their Roth IRAs combined.
Step 2: Gather All the Necessary Information and Documents
Now that you're sure you're eligible, it's time to get organized. Having all of this information ready will make the online application process much smoother and faster.
For the Custodian (you):
Personal Information: Your full legal name, date of birth, Social Security number, and contact information (address, phone number, and email).
Identification: A government-issued ID like a driver's license or passport.
Bank Information: Your bank account and routing number to link for funding the account.
For the Minor (the beneficiary):
Personal Information: Their full legal name, date of birth, Social Security number, and address.
Proof of Earned Income: While you don't typically submit this with the application, you must be able to verify that the minor has earned income and that the contribution amount does not exceed that income. Keep records like pay stubs, W-2s, or a detailed log of their self-employment earnings.
Step 3: Begin the Online Application with Vanguard
This is the main event! Vanguard's online platform is user-friendly, and you can complete the entire application from the comfort of your home.
Navigate to Vanguard's Website: Go to the official Vanguard website and look for the "Open an account" or "Accounts & plans" section.
Select the Account Type: You will need to choose the appropriate account. Look for "IRA" and then select "Roth IRA." Since you are opening it for a minor, the application will prompt you to indicate that you are opening a custodial account. Vanguard may refer to it as a "custodial account for a minor" or similar language.
Provide Your Information: You will be prompted to enter all of your personal information as the custodian. Fill this out accurately.
Enter the Minor's Information: Next, you'll provide all the details for the minor beneficiary, including their SSN. This is a critical step, as the account is titled in the minor's name "for the benefit of" the minor.
Review and e-Sign: Carefully review all the information you have entered. Read the account agreement, disclosures, and terms and conditions. Once you are satisfied, you will e-sign the documents to complete the application.
Step 4: Fund the Custodial Roth IRA
Congratulations, you've opened the account! Now it's time to put some money in it. You can fund the account in several ways:
Electronic Bank Transfer: This is the most common and easiest method. You can link your bank account (or the minor's, if they have one) to the Vanguard account and transfer funds electronically. This is also how you can set up recurring, automatic contributions, which is a fantastic habit to build!
Check: You can mail a check to Vanguard. Make sure to include the minor's account number on the check.
Transfer from another account: If you have an existing Vanguard account, you may be able to transfer funds directly from there.
Important consideration: Remember the contribution limits. For 2025, the total contribution can't be more than the minor's earned income or $7,000, whichever is less.
Step 5: Choose the Investments
This is where the magic of compounding begins! A Roth IRA is just a vessel; you need to fill it with investments to make it grow. Vanguard offers a wide range of options, from simple, all-in-one funds to individual stocks and ETFs.
Sub-heading: Consider these investment strategies for a minor's long-term growth:
Target-Date Retirement Funds: These are often the easiest and most effective option for a hands-off approach. Vanguard's Target Retirement Funds are a great example. You choose a fund based on the year the minor is expected to retire (e.g., Vanguard Target Retirement 2070 Fund). The fund's asset allocation automatically becomes more conservative as the target date approaches. It's an all-in-one, diversified portfolio.
Index Funds and ETFs: This is a classic Vanguard strategy. You can choose a broad market index fund like the Vanguard Total Stock Market Index Fund (VTSAX) or the Vanguard S&P 500 ETF (VOO). These funds offer broad diversification at a very low cost, which is ideal for a long-term investment horizon.
Balanced Funds: If you want a mix of stocks and bonds in a single fund, a balanced fund can be a good choice. For a young investor, a fund with a higher allocation to stocks is usually appropriate due to the long time horizon.
Custom Portfolio: For the more hands-on custodian, you can build a custom portfolio with a mix of different Vanguard ETFs and mutual funds, such as a combination of domestic and international stock funds and a bond fund.
Remember this vital tip: For a young investor, a more aggressive allocation (e.g., 90-100% stocks) is often recommended due to their long time horizon. They have decades to ride out market fluctuations and benefit from growth.
Step 6: Set Up Automatic Contributions
You've opened, funded, and invested. Now, make it a habit! Setting up a recurring automatic investment plan is the best way to leverage the power of dollar-cost averaging. This means you invest a fixed amount regularly, regardless of market highs or lows, which helps to smooth out returns over time. It takes the emotion out of investing and ensures consistent growth.
10 Related FAQs: Quick Answers
How to find out the minor's earned income?
You can ask for their pay stubs, W-2 forms from their employer, or, if they are self-employed, have them keep a detailed log of their earnings from each client or job. This is a great opportunity to teach them about managing their finances!
How to transfer a custodial Roth IRA from another brokerage?
You can initiate a transfer from your new Vanguard account. You will need to provide the account number from the old brokerage and fill out a transfer form. Vanguard will handle the rest.
How to withdraw money from a custodial Roth IRA?
The minor can withdraw their contributions at any time, tax-free and penalty-free. However, withdrawing earnings before age 59½ can be subject to taxes and a 10% penalty, unless the withdrawal qualifies for a specific exception (e.g., for a first-time home purchase or qualified education expenses).
How to change the custodian on the account?
You will need to contact Vanguard directly and complete a change of custodian form. This is typically done if the original custodian passes away or can no longer manage the account.
How to handle taxes for a custodial Roth IRA?
Contributions are made with after-tax dollars, so they are not tax-deductible. The minor may need to file a tax return to report their earned income, but the Roth IRA contributions themselves are not deductible. The earnings within the account grow tax-free.
How to get my minor beneficiary a login for the account?
Once the account is established, you can contact Vanguard's customer service to discuss setting up access for the minor. Typically, as the custodian, you have full control until they reach the age of majority.
How to find the best Vanguard funds for a minor?
For long-term growth and simplicity, consider a Vanguard Target Retirement Fund that matches their expected retirement year (e.g., 2070 or 2075). For a more hands-on approach, low-cost index funds like VTSAX or VFIAX (Vanguard 500 Index Fund) are excellent, broadly diversified options.
How to know when the minor will take control of the account?
The age of majority depends on your state's Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) laws. In most states, it is 21, but in some, it can be 18. Vanguard will notify you when the transfer needs to be initiated.
How to contribute more than the earned income limit?
You cannot. The contribution is strictly limited to the lesser of the earned income or the annual IRS limit. Over-contributions can lead to penalties.
How to teach the minor about their account?
This is the fun part! Show them the account statements, explain what the investments are, and track the growth together. Teach them the concept of compounding and why saving early is so powerful. This is a fantastic financial literacy lesson in the making.
