Last updated: February 2026
When you're building wealth for your children, two account types come up more than any other: the custodial Roth IRA and the UGMA (Uniform Gifts to Minors Act) account. Both are powerful tools, but they serve very different purposes and have different rules.
As a business owner who pays your children for legitimate work, you have access to both. And in many cases, the smartest move is to use them together.
Here's how each one works, how they compare, and how to decide which is right for your family.
The Custodial Roth IRA
A custodial Roth IRA is a retirement account opened in your child's name, with you as the custodian until they reach the age of majority (18 or 21 depending on your state). Contributions are made with after-tax dollars, growth is tax-free, and qualified withdrawals in retirement are also tax-free.
The critical requirement: your child must have earned income. Allowance money, birthday gifts, and investment returns don't count. But wages from working in your business absolutely do. This is one of the biggest advantages of hiring your children. It unlocks the Roth IRA.
In 2026, your child can contribute up to $7,500 or their total earned income for the year, whichever is less. So if your child earns $5,000 from working in your business, they can contribute up to $5,000 to a Roth IRA. The money doesn't have to come from the child's earnings directly. You can contribute the money on your child's behalf, as long as they have enough earned income to cover the contribution amount.
For a complete overview of how the Roth IRA works for kids, see our guide: Roth IRA for Kids: Rules, Limits and How to Start (2026).
Roth IRA Advantages
- Tax-free growth for decades. If your child starts contributing at age 8, that money has roughly 50 or more years to compound before they reach typical retirement age.
- Contributions (not earnings) can be withdrawn anytime without penalty. This gives your child flexibility later in life if they need the money before retirement.
- No required minimum distributions. Unlike traditional IRAs, Roth IRAs don't force withdrawals at a certain age.
- Does not affect financial aid calculations the way a UGMA might, since retirement accounts are typically not counted as student assets on the FAFSA.
Roth IRA Limitations
- Requires earned income. No earned income, no contributions. This is why hiring your child through your business is the key that unlocks this strategy.
- Annual contribution limits. In 2026, the cap is $7,500. You can't make up for missed years.
- The money is meant for retirement. While contributions can be withdrawn penalty-free, earnings withdrawn before age 59 and a half (with some exceptions) may face taxes and penalties.
- Your child gets full control when they reach the age of majority. At that point, they can do whatever they want with the account.
The UGMA Account
A UGMA account is a custodial investment account where a parent (or anyone) can deposit money for a child's benefit. The parent manages the account until the child reaches the age of majority, at which point ownership transfers completely to the child.
Unlike a Roth IRA, UGMA accounts have no earned income requirement. You can fund a UGMA with any money, whether it's a monthly deposit from your personal account, birthday money from grandparents, or anything else. This makes them accessible regardless of whether you hire your child.
A consistent strategy is to deposit $100 per month into a UGMA account at Vanguard for a child starting at age five, setting it up the same for each child as soon as they receive their Social Security number. Running on autopilot from the start is one of the most powerful things you can do for a child's financial future.
UGMA Advantages
- No earned income requirement. Anyone can contribute at any time for any reason.
- Flexible use. The money can be used for anything that benefits the child, including education, a first car, a business venture, or general savings.
- No contribution limits (within gift tax rules). You can contribute up to $18,000 per year (the 2026 annual gift tax exclusion) per recipient without filing a gift tax return. Married couples can give up to $36,000 per child.
- Simple to set up. Most brokerages offer UGMA accounts with straightforward online applications. No earned income documentation needed.
UGMA Limitations
- Taxable. UGMA investment earnings are subject to the "kiddie tax" rules. The first $1,300 of a child's unearned income is tax-free, the next $1,300 is taxed at the child's rate, and anything above $2,600 is taxed at the parent's rate (for children under 19, or under 24 if a full-time student).
- The child gets full control at the age of majority. Once your child turns 18 (or 21 in some states), the money is legally theirs and they can spend it however they want.
- Counts as the child's asset for financial aid. UGMA accounts are assessed at 20% on the FAFSA, which can reduce financial aid eligibility significantly higher than parent-owned assets (assessed at about 5.6%).
- Irrevocable gifts. Once money is deposited into a UGMA, it belongs to the child. You can't take it back or redirect it.
Side-by-Side Comparison
| Feature | Custodial Roth IRA | UGMA Account |
|---|---|---|
| Earned income required? | Yes | No |
| 2026 contribution limit | $7,500 or earned income (whichever is less) | No limit (gift tax rules apply above $18,000 per giver) |
| Tax treatment of growth | Tax-free | Subject to kiddie tax rules |
| When can child access? | Contributions anytime; earnings at 59.5 (with exceptions) | Full access at age of majority (18 or 21) |
| Impact on financial aid? | Generally not counted | Counted at 20% as child's asset |
| Best for | Long-term retirement wealth, tax-free compounding | Flexible savings, shorter-term goals, generational wealth |
Why Business Owners Should Use Both
If you're already paying your child through your business, you're in a unique position to fund both accounts simultaneously.
The Roth IRA captures the tax-free growth opportunity that comes with earned income. Your child's business wages create the eligibility, and even small contributions at a young age grow into substantial amounts over 50 or more years of compounding.
The UGMA provides a flexible savings vehicle that doesn't require earned income and can be used for near-term goals. It's also a way for grandparents and other family members to contribute to your child's financial future.
Here's one approach: a child earns wages from working in a business. A portion of those earnings goes into a custodial Roth IRA at Vanguard. Separately, $100 per month goes into a UGMA account at Vanguard, which has been running since the child was five. The two accounts serve different purposes and don't conflict with each other.
The Roth is the retirement foundation. The UGMA is the flexible wealth-building account. Together, they give a child a financial head start that most adults don't have.
Which Should You Fund First?
If you have limited funds and need to choose, the Roth IRA typically wins for business owners' children. The tax-free growth is too powerful to pass up, and the earned income requirement means you can only take advantage of it while your child is working in your business.
The UGMA can be started at any time by anyone, so it's less time-sensitive. It's also a great option for family members who want to contribute but can't fund the Roth IRA directly.
If you can afford both, do both. Even a small UGMA contribution of $50 or $100 per month adds up over 15 or more years of compounding.
Setting It Up
Both accounts can be opened at most major brokerages. Vanguard, Fidelity, and Schwab all offer custodial Roth IRAs and UGMA accounts with low or no minimums.
For the Roth IRA, you'll need to verify your child's earned income. This is where your payroll records come in. The documentation showing wages earned gives you the basis for the Roth IRA contribution. Learn more about what records to keep for the IRS.
For the UGMA, the process is simpler. You'll need your child's SSN and your information as the custodian. Most brokerages let you open the account online in a few minutes and set up automatic monthly contributions.
One practical note: to fund either account via ACH transfer, your child will typically need a checking account linked to the brokerage. See our guide on how to open a bank account for your child for step-by-step instructions.
Use our Tax Savings Calculator to see how much you could save by paying your kids through your business this year.
Frequently Asked Questions
Can I contribute to both a Roth IRA and UGMA in the same year?
Yes. They're completely separate accounts with separate rules. Roth IRA contributions come from earned income, UGMA contributions come from gifts. There's no overlap or conflict.
Who controls the UGMA after my child turns 18?
Your child does. Full ownership transfers at the age of majority. This is an irrevocable transfer, so have conversations with your child about financial responsibility as they get closer to that age.
Can UGMA money be used for college?
Yes, but be strategic. UGMA assets are counted at 20% on the FAFSA, which can reduce financial aid. A 529 plan may be more efficient for college savings if financial aid is a concern.
What happens to the Roth IRA when my child turns 18?
The custodial Roth IRA converts to a regular Roth IRA in your child's name. They gain full control of the account. The money stays invested and continues to grow tax-free.
Can grandparents contribute to a UGMA?
Absolutely. Anyone can contribute to a UGMA account. This makes it a great vehicle for grandparents, aunts, uncles, or family friends who want to invest in your child's future.
Should I use Vanguard, Fidelity, or Schwab?
All three are excellent choices for both custodial Roth IRAs and UGMA accounts. Fidelity and Schwab have $0 minimums for most accounts, while Vanguard may require a minimum for certain fund purchases. Choose whichever platform you're most comfortable with.
Disclaimer: This article is for educational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified professional for guidance specific to your situation.