Roth IRA For Your Child With Cash Income
This post explains how to fund a Roth IRA for your child using cash income that isn't reported to the IRS — and what it costs to do it right.
Background
Your child must have earned income that the IRS knows about to contribute to a Roth IRA.
The easiest scenario is when your child has a W-2 from a part-time job — as a barista, camp counselor, or lifeguard. The W-2 automatically reports their income to the IRS, and you're good to go. (See: open a Roth IRA for your child.)
But what if your child earns cash that nobody reports — lawn mowing, babysitting, dog walking? They can still contribute to a Roth IRA, but they'll need to file a tax return. That creates a small tax bill and some paperwork, but it may well be worth it. Read on to decide.
What Not to Do
Say your child earned $2,500 in cash last year. You want to fund a Roth IRA for them — but skip the tax return to keep things simple.
Don't do it. The IRS will catch this. The custodian of your child's Roth IRA is required to report the $2,500 contribution to the IRS, and the IRS won't find $2,500 of corresponding earned income for your child anywhere in their records.
File a Tax Return for Your Child
Dependent children generally don't have to file a federal tax return unless their earned income exceeds the standard deduction for dependents ($15,750 for 2025). Most kids earning cash from odd jobs fall well below this, which is why most don't file.
However, if your child has cash income and wants to make a Roth IRA contribution, they should file a tax return. Filing puts the income on record with the IRS, which is what permits the Roth IRA contribution.
How the Tax Return Works
Let's use a concrete example: your child earned $2,500 in cash. They file a tax return to unlock the Roth IRA contribution.
Because they're self-employed (as a lawn care provider, babysitter, etc.), their return includes a Schedule C (Profit or Loss from Business) showing $2,500 in net profit.
Here's what that produces:
Tax owed: $383 ($0 income tax + $383 self-employment tax)
Maximum Roth IRA contribution: $2,308
Why Is the Max Contribution $2,308, Not $2,500?
For a self-employed person, "earned income" for Roth IRA purposes equals net profit minus half the self-employment tax. (Don't ask why — just accept it.)
$2,500 − $192 (half of $383.50, rounded up) = $2,308 maximum Roth IRA contribution
A Quick CYA Note
Technically, anyone with at least $400 of self-employment income is required to file a tax return — whether or not they want to fund a Roth IRA. In practice, kids rarely file returns for small cash earnings unless a Roth IRA is the goal. But it's worth knowing the rule.
State Tax Return: Required?
Your child may or may not need to file a state return as well. Check the instructions for your state's return — for example, Illinois filers use Form IL-1040. The lower the income, the less likely a state filing is required, but the rules vary.
Is Filing a Tax Return Worth It?
Weigh the costs against the benefits.
Benefits:
Tax-free growth in the Roth IRA for decades — potentially 50+ years if your child is young
A real-world opportunity to teach your child about investing and money
Costs:
Tax owed ($383 in this example)
Tax prep cost (additional CPA time or an extra TurboTax return)
Your time to coordinate and file
For most families, the math strongly favors doing it — a few hundred dollars in tax today to kickstart decades of tax-free compounding is a genuinely good trade. But you're the one who has to weigh the hassle.
Ready to put this into practice? If you're an ER physician or high-income professional looking for straightforward, evidence-based financial guidance, we'd love to connect. Schedule a free intro call with Yahara Wealth Management — no pressure, no sales pitch, just a conversation.
This content is for educational purposes only and does not constitute personalized tax or financial advice. Tax rules change annually — consult a qualified tax professional before making decisions based on this information.