Custodial IRAs: Helping the Next Generation Build Wealth Early

When it comes to building long-term financial security, time is one of the most powerful tools. For parents, grandparents, or a guardian who wants to give the next generation a head start, Custodial IRAs are a smart and tax-advantaged way to do just that. 

At JTM Williams Capital Management, we often guide families through the benefits and strategies of using Custodial IRAs to maximize early growth and create opportunities for the future. Let’s discuss.

What Is a Custodial IRA?

A Custodial IRA is a retirement account set up for a minor by a parent, grandparent, or guardian. Because children under 18 (or 21, depending on state law) cannot legally open accounts on their own, a custodian manages the account until the child reaches adulthood. After that, the young adult takes full ownership.

Custodial IRAs work just like standard IRAs in terms of contribution limits, tax benefits, and investment options. The only requirement is that the child must have earned income. Babysitting, summer jobs, or part-time work can qualify as income to fund the account.

Benefits of a Custodial IRA

There are several key advantages to opening a Custodial IRA for a child:

1. Decades of Compounding Growth

The earlier someone begins investing, the longer their money has to grow. A modest contribution during high school years can grow significantly by retirement thanks to compounding interest. For example, a $1,000 contribution at age 15 could grow into tens of thousands by age 65, depending on market performance.

2. Tax Advantages

Families can choose between a Custodial Traditional IRA or a Custodial Roth IRA.

• With a Custodial Traditional IRA, contributions may be tax-deductible, and growth is tax-deferred until withdrawals in retirement.

  
  

• With a Custodial Roth IRA, contributions are made with after-tax dollars, but the growth and qualified withdrawals are completely tax-free. This makes Roth IRAs especially powerful for children, who are likely in low tax brackets now.

3. Teaching Financial Responsibility

Beyond the numbers, a Custodial IRA is a great teaching tool. Parents can show children how investments work, why saving early matters, and how financial decisions today can shape long-term wealth.

4. Flexible Future Use

Although designed for retirement, Custodial IRAs offer flexibility. Contributions (not earnings) in a Roth IRA can be withdrawn at any time without penalties, making it useful for education expenses, a first home, or emergencies down the road.

Custodial IRA Rules to Keep in Mind

Like all retirement accounts, Custodial IRAs come with specific rules:

• Contribution Limits: In 2025, contributions are limited to $7,000 or the child’s earned income, whichever is less.

  
  

• Control: The custodian manages the account until the child reaches legal adulthood. After that, control shifts entirely to the child.

  
  

• Withdrawals: Early withdrawals of earnings may trigger penalties unless used for qualified expenses like higher education or a first home purchase.

Understanding these rules is key to ensuring that a Custodial IRA is set up and used effectively.

Custodial IRAs with JTM 

At JTM, we specialize in personalized wealth strategies that support families across generations. Setting up a Custodial IRA is not just about opening an account—it’s about integrating it into a family’s broader financial plan. 

We help you decide whether a Custodial Roth IRA or a Custodial Traditional IRA makes more sense, how to invest contributions wisely, and how to use the account as an educational tool for your child.

By planning early, you can provide your child or grandchild with a financial foundation that grows alongside them.

A Custodial IRA is one of the most impactful gifts you can give to the next generation. It combines tax advantages, long-term growth potential, and financial education in one simple account. Whether you’re a parent wanting to set your child up for success or a grandparent looking to create a lasting legacy, Custodial IRAs are a smart addition to your financial strategy.

At JTM, we are here to guide you every step of the way: from choosing the right account type to managing investments with care. Contact us today to learn how a Custodial IRA can fit into your family’s financial future.