What parents should know about earned income, family-business employment, IRS rules, and starting their child’s financial future.
As a father of two boys, I sometimes think about the financial opportunities I wish I had understood earlier.
One of my sons is now 15 years old. And I wonder: What if I had known more about Roth IRAs for kids when he was just one year old?
Could I have started investing for his retirement that early?
The answer might surprise you.
Yes, you can potentially open a Roth IRA for a 1-year-old child. There is no minimum age to own a Roth IRA. However, the child must have legitimate earned income to make contributions.
This is where many parents misunderstand the rules.
Let’s explore how it works, especially if you own a family business.
1. Can a 1-Year-Old Have a Roth IRA?
Yes. The IRS does not impose a minimum age requirement for opening a Roth IRA.
A parent or guardian can generally establish a custodial Roth IRA for an eligible minor. The adult manages the account until control transfers to the child under applicable state law and account terms.
But here’s the important distinction:
Being eligible to own a Roth IRA does not automatically mean your child can contribute to one.
According to IRS Publication 590-A, IRA contributions generally require eligible compensation.
For 2026, the annual IRA contribution limit for individuals under age 50 is $7,500, or their eligible compensation for the year, whichever is less. Roth IRA income eligibility rules also apply.
For example, if your child legitimately earns $1,000 during the year, the maximum regular IRA contribution would generally be $1,000.
Parents may fund that contribution using their own money, provided the child has sufficient eligible compensation and satisfies the other contribution requirements.
2. What Counts as Earned Income for a Child?
Eligible income generally includes wages from legitimate employment and qualifying self-employment earnings.
Depending on the child’s age and applicable laws, examples might include:
- Working in a family-owned business.
- Performing legitimate modeling or acting assignments.
- Providing age-appropriate services for compensation.
- Earning qualifying income from a genuine small business.
However, birthday gifts, allowances for routine household chores, and money transferred by parents generally do not count as eligible compensation.
You cannot simply give your child $5,000, call it earned income, and contribute it to a Roth IRA.
The income must come from actual qualifying activity.
3. Can You Pay Your Child Through Your Family Business?
As a business owner, I see real value in involving children in a business when they are capable of performing meaningful work.
An older child might help organize inventory, perform appropriate administrative tasks, or assist with business activities.
But can you legally employ a one-year-old?
This is much more complicated.
Under federal rules, certain employment arrangements involving parent-owned businesses or entertainment work may be permitted at very young ages. However, applicable state child labor laws may be more restrictive.
For an infant, legitimate work opportunities are exceptionally limited. A genuine, legally permitted commercial modeling assignment might qualify, but simply using your baby’s photograph in business marketing does not automatically establish employment or earned income.
The work must be real, compensation reasonable, and the arrangement legally permitted.
Owning a business does not automatically allow you to put your baby on payroll.
Business structure matters, too. The IRS applies different employment tax rules to sole proprietorships, partnerships, and corporations.
Before employing a minor, consult qualified tax and employment-law professionals.
4. What Documentation Do You Need?
If you legitimately employ your child, proper records are essential.
Consider maintaining:
- A clear description of the work and its business purpose.
- Records of actual services, assignments, and dates.
- Documentation supporting reasonable compensation.
- Proof of payment and applicable payroll records.
- Required tax forms and employment-related documentation.
The objective is not simply to create paperwork. It is to establish that genuine services were performed and properly compensated.
5. Four Common Roth IRA Misconceptions Parents Should Avoid
Misconception 1: Every child can contribute to a Roth IRA.
Only children with sufficient eligible compensation can make regular contributions, subject to other applicable requirements.
Misconception 2: Parents can create earned income by giving an allowance.
Ordinary parental allowances and gifts generally do not qualify.
Misconception 3: Any family-business payment qualifies.
Payments must reflect genuine services, reasonable compensation, and lawful employment.
Misconception 4: Starting early guarantees wealth.
A Roth IRA offers potential long-term tax benefits, including tax-free qualified withdrawals, but investments carry risk. Returns are never guaranteed.
6. What If Your Child Doesn’t Have Earned Income?
Here’s what I want parents to remember.
You do not need to wait until your child qualifies for a Roth IRA to start financial planning.
Depending on your goals, other possibilities include:
- 529 education savings plans: Tax-advantaged savings for eligible education expenses.
- Custodial investment accounts: Assets held for the benefit of a minor, subject to ownership, tax, and transfer rules.
- Other savings and protection strategies: Options that should be evaluated based on their costs, benefits, restrictions, and suitability.
I discuss these ideas further in my article, 5 Investments I Make for My Kids to Help Them Become Wealthy.
My Final Thoughts: Start Early, But Start Right
As parents, we invest considerable time thinking about our children’s education, health, and happiness.
But we should also teach them how money works.
If I could go back 15 years, I would spend more time learning about the opportunities available to young families, understanding the rules, and building good financial habits early.
A Roth IRA can be valuable for an eligible working child. But it is not the only path.
The real goal isn’t opening a retirement account for a one-year-old. It’s creating a financial foundation that grows with your child.
Because the decisions we make today can influence the opportunities our children have tomorrow.
Knowledge is Magic. Action is Power. Legacy is Forever.
References
- IRS Publication 590-A: Contributions to Individual Retirement Arrangements
- IRS: 2026 IRA Contribution Limits
- IRS: Family Employees
- U.S. Department of Labor: Child Labor Rules