In a May 2026 survey of 1,000 U.S. parents of 8- to 15-year-olds, 87 percent said they have created, or plan to create, an investment strategy with their child.[1] The survey does not say how many have actually started — “plan to” is doing a lot of work in that number. For many of those families, the strongest first move is a custodial Roth IRA, and the one thing standing between a kid and that account is earned income.
Ninety-five percent of the same parents say their child earns money in at least one way.[1] Look at how, though. The most common source is payment for chores (78 percent), followed by payment for good grades or good behavior (67 percent). Neither is compensation in the IRS sense. Fewer kids, 57 percent, are paid for odd jobs such as babysitting, shoveling or lawn mowing, and 14 percent for selling or reselling online.[1] Those two are the ones that can open the door to a custodial Roth IRA — and only when the work is done for someone outside the family or for a real business.
The survey also puts the average child’s spending money at $52 a week. That figure covers every source, allowance included. It is money to spend, not earned income, and it says nothing about how much a child could put into a Roth IRA.
The distinction matters because the Roth IRA is one of the best accounts a young person can own. Every dollar that goes in after tax grows tax-free forever. But the IRS will not accept a contribution unless the child has compensation — which is the IRS word for earned income. Understanding which income types qualify is the first step.
What “Earned Income” Actually Means
The IRS uses the word “compensation” rather than “earned income” in the rules governing IRA contributions,[2] and the two terms mean the same thing in this context. Compensation includes:
- wages, salaries, and tips received for work performed,
- commissions and professional fees,
- net earnings from self-employment (after deducting business expenses and the deductible portion of self-employment tax), and
- taxable scholarship or fellowship income received for services rendered (less common for younger children).
Compensation does not include interest, dividends, capital gains, rental income, pension or annuity income, or any amount that is excluded from income under the tax rules. It also does not include passive income or money received as a gift, regardless of the size of the gift.
The Roth IRA contribution limit for 2026 is the lesser of $7,500 or total compensation for the year.[3] A child who earns $800 babysitting can contribute up to $800. A child who earns $4,000 from a summer gig can contribute up to $4,000. The child does not have to be the one making the contribution — a parent, grandparent, or anyone else can deposit the money on the child’s behalf, up to that limit.
The Yes, No, and Maybe Breakdown
The table below covers the most common ways Gen Alpha kids earn money, with a plain answer on whether each counts for a Roth IRA contribution.
The Chore and Allowance Line
The IRS has not published a bright-line rule separating “chore-based allowance” from “self-employment income.” The practical distinction comes down to whether the child is performing specific, defined services for a specific, agreed-upon payment.
An allowance fails the test on two counts. First, it is typically received regardless of performance — the child gets the money even if some chores are skipped. Second, household chores performed for the child’s own family generally do not constitute arm’s-length transactions; the IRS expects compensation to arise from services rendered to someone else, or to a business.
What shifts the needle toward compensation: an explicit agreement specifying the service and the rate (for example, “$15 to mow the neighbor’s lawn”), payment contingent on completion, and a third-party payer (not the child’s own parents paying for household chores). Those elements look like a real business arrangement, because they are.
The allowance vs. earnings guide on ELI walks through how to frame family money conversations so the distinction is clear to kids and to the IRS.
Working for Your Own Family’s Business
A child working in a parent’s sole proprietorship or partnership where both partners are the child’s parents is in a special tax situation. Wages paid to a child under 18 in that business are exempt from FICA (Social Security and Medicare taxes), but they are still subject to income tax — and they still count as compensation for Roth IRA purposes.[4]
This exemption does not apply to a family-owned corporation, including an S-corp. If the business is incorporated, even a family-controlled one, the child’s wages are subject to the same FICA withholding as any other employee’s.
In either structure, the wages must be reasonable — meaning a pay rate that an unrelated employer would pay for the same work. Paying a 10-year-old $50 an hour to “help with social media” is a red flag. Paying the same child $12 an hour to actually stuff envelopes and organize files is defensible.
The kids and business section of the ELI education hub covers how to set this up correctly, including what records to keep and when a payroll service is worth the cost.
How to Document the Income
The IRS does not require a child to file a tax return solely because they contributed to a Roth IRA. But if the IRS ever questions whether the child had earned income, documentation is the answer.
A simple log covers most situations:
- date of the job or service,
- name of the person who paid,
- description of the service performed,
- amount received, and
- any direct costs deducted (supplies, materials).
For self-employment income under $400 in net profit for the year, no Schedule SE is required, but the income still counts as compensation for Roth IRA purposes.[5] Once net self-employment income exceeds $400 in a calendar year, a Schedule C and Schedule SE are required as part of the child’s tax return.
Receipts, text messages, or a simple spreadsheet all serve as documentation. The goal is to be able to say, if asked: here is who paid my child, for what, and when. The documenting child income education page has a printable template.
When a side hustle grows and taxes become a regular concern, the teen side-hustle tax guide picks up from there — quarterly estimates, deductible expenses, and when to involve a tax professional.
Where the Money Goes
Once you have confirmed that the income qualifies, the question is where to put it. The right account depends on how much the child earns and what the money is for. Three accounts cover it:
1. A savings account for younger kids and small amounts. The habit of saving a percentage of every payment is more durable than any particular account. For a younger child earning a few dollars at a time, a credit union savings account or a youth savings account at a community bank gives them a tangible place to watch money build. The kids’ bank account guide covers what age they can open one.
2. A brokerage account once the income is real. When a teen is earning steady money — a regular babysitting roster, a lawn-care route, an online resale business — a brokerage account is the better home for anything beyond pocket cash. Brokerages hold uninvested cash in a core position, often a money market fund, which has generally paid more than a standard bank savings account. (A money market fund is not FDIC-insured, so check how the specific account holds cash.) It also keeps the money next to the rest of the investing tools. A teen saving for a medium-term goal like a first car can move part of it into a short-term Treasury fund or an index fund without opening anything new. Fidelity’s Youth Account and Schwab’s Teen Investor Account are the main options for 13- to 17-year-olds; the Fidelity Youth vs. Schwab Teen Investor comparison covers which fits.
3. A custodial Roth IRA for the long-term money. The Roth IRA grows tax-free. Contributions (not earnings) can be withdrawn at any time without penalty, so it is not a lockbox — but the account works best when the money stays invested. A child who puts in $500 a year from age 10 through 17, averaging 7% returns, would have roughly $5,500 at 18. Left alone with no further deposits, that grows to about $12,000 by 30 and about $130,000 by 65, all tax-free.
The Family Financial Stack post shows how these three accounts layer with the 529, the UTMA and the Trump Account from birth to 18.
The Roth IRA for kids FAQ covers where to open a custodial Roth IRA, which brokerages serve younger account holders, and what happens to the account when the child reaches adulthood. The post first paycheck and the custodial Roth IRA walks through the opening process step by step, and the teen summer jobs post covers the formal-employment version of the same setup.
Frequently Asked Questions
Does the child have to file a tax return to contribute to a Roth IRA?
No. Filing a tax return is not a prerequisite for a Roth IRA contribution. What matters is that the child has earned income in the amount being contributed. If self-employment income is under $400, no return or Schedule SE is required, though keeping records is still wise. If the child earns wages from an employer (including a family business), a W-2 is issued regardless of whether the child files.
Can a parent contribute to the custodial Roth IRA on behalf of the child?
Yes. Anyone can fund the custodial Roth IRA — a parent, grandparent, aunt or uncle — as long as the total contribution does not exceed the child’s earned income for the year and does not exceed the annual limit ($7,500 for 2026). The child does not have to be the one writing the check or making the transfer.
What if the child earns income but also has interest from a savings account? Does the interest help the IRA limit?
No. Investment income — interest, dividends, capital gains — does not count toward the compensation limit for IRA contribution purposes.[2] Only earned income counts. A child with $50 in babysitting income and $200 in savings account interest can contribute only $50 to a Roth IRA, not $250.
Can a child have too much income to contribute to a Roth IRA?
A child can exceed the Roth IRA income limit, though it is unusual. For 2026, single filers begin to phase out at $153,000 in modified adjusted gross income (MAGI) and are fully phased out above $168,000.[3] Most children earning money from babysitting and odd jobs will be nowhere near those thresholds.
My 8-year-old earned $180 from a lemonade stand. Can I put that in a Roth IRA?
Yes — if the $180 is net profit (after deducting the cost of supplies). A lemonade stand is a real business, and net earnings from a business count as self-employment income regardless of the earner’s age. Open a custodial Roth IRA at a brokerage that accepts minor accounts, deposit up to $180, and let the clock start. The kids make money guide covers more ways younger children generate qualifying income.
The Bottom Line
The Gen Alpha generation is earning money earlier, and in more ways, than any prior generation — babysitting, dog walking, selling crafts, doing odd jobs for neighbors. Most of that income qualifies for a custodial Roth IRA. Allowances and gifts do not, and the difference is straightforward once you know the IRS definition.
Allowances do not qualify. Babysitting does. The difference is whether the child earned the money by doing something for someone else.
If you are one of the 87 percent planning an investing strategy with your child, this is where the plan becomes an account. Find the income that qualifies, write it down, and let it fund a custodial Roth IRA.
The 2026 contribution limit is the lesser of $7,500 or total earned income. A child who earns $800 this year can put $800 into a custodial Roth IRA — and that $800, invested now, will compound tax-free for decades. Document what the child earned, open the account, and make the contribution before the tax-year deadline (April 15 of the following year).
