The age of majority is 18 in most states in the U.S. Kids under 18 are allowed to work for pay but they aren’t allowed to open an account with a financial institution unless an adult over 18 is either a joint owner or a custodian. This is because kids under 18 can’t legally sign a contract and agree to the terms.
When a kid works for pay, a parent can open a Roth IRA for the kid and fund the Roth IRA with the parent’s money, up to the kid’s earned income. However, an IRA by definition has only one owner; there’s no joint IRA. Because the kid under 18 can’t open the account him- or herself, an adult has to do it as the custodian.
This type of account is called a custodial IRA. The kid is the owner. The adult is the custodian.
A custodial IRA is different from a UGMA/UTMA account. A custodial IRA is tax free if you choose the Roth flavor. A UGMA/UTMA account is still taxable. But funding a custodial IRA is limited to the kid’s earned income; a UGMA/UTMA account doesn’t have such requirement.
Not all places offer a custodial IRA. For instance Fidelity will not open an IRA unless the owner is at least 18. Maybe the market is too small. Many kids work but their parents aren’t willing to fund a Roth IRA for the kids when the parents themselves don’t save enough for their own retirement.
If you find a place that offers a custodial IRA, the next hurdle is the minimum amount required for opening an IRA and the fees charged on small accounts. The kid’s earned income may be very small. That’s another reason financial institutions aren’t that interested in this type of accounts.
Vanguard offers a custodial IRA but the minimum amount required to open one is $1,000.
Fortunately some places have a long-term view. They make it easy for kids and their parents because they understand a relationship entered into when the kids are young will likely last when the kids become adults.
Charles Schwab, for example, offers a custodial IRA with a $100 minimum and no maintenance fees. You can invest in low cost Schwab index funds which require only $100 minimum and no purchase fees. A kid’s IRA at Schwab can have a diversified portfolio with very little money.
If your kids work, seize the opportunity to open a custodial Roth IRA for them.