Starting young can turn small dollars into serious wealth. If a child or teen earns income from a job or side gig, a Roth IRA can lock in tax-free growth for decades while teaching real-world money skills. This guide is written for parents, guardians, and motivated teens who want a practical, compliant, and confidence-building path to get started. Quick definition: A Roth IRA for kids and teenagers is a custodial retirement account funded with a minor’s earned income; contributions grow tax-free and (under qualifying rules) can be withdrawn tax-free later. For now, total IRA contributions are limited to the lesser of $7,000 or the child’s taxable compensation.
This article is educational and not individualized tax or investment advice. Confirm details with a qualified tax professional—especially for self-employment, payroll, and state-specific rules.
1. Prove Earned Income (No Age Limit, but Work Is Required)
A child can contribute to a Roth IRA at any age as long as they have taxable compensation—wages from a summer job, tips from food service, or net earnings from self-employment like lawn care or babysitting. The Roth IRA limit for now is $7,000, but the child’s contribution still cannot exceed what they actually earned that year. The money going into the account doesn’t have to come from the child’s own bank account; a parent or grandparent can deposit funds on the child’s behalf, provided the child earned at least that much. What doesn’t count: gifts, allowances, and investment income. Starting here avoids the most common pitfall—contributing without proof of earnings.
1.1 Why it matters
- The earned-income rule is the Roth gatekeeper for minors; it is how the IRS ensures contributions reflect real work.
- There’s no age restriction on IRA contributions if compensation exists, so a 12-year-old with legitimate earnings can qualify.
- If the IRS questions a contribution, clean records keep you stress-free.
1.2 Numbers & guardrails
- Annual IRA limit (under age 50): $7,000, or the child’s taxable compensation, whichever is less.
- Example: A teen earns $2,800 in 2026. Up to $2,800 can go into the Roth IRA. Grandma can fund it; the cap is still $2,800.
Mini-checklist
- Keep pay stubs, W-2s/1099s, invoices, and a simple earnings log.
- For cash jobs, note date, client, service, hours, and amount (and deposit to a bank account when possible).
- Save a folder labeled “2026 Earnings — [Child’s Name]” with digital scans.
Bottom line: If you can document work-based pay, you can contribute—regardless of age, up to the annual limit.
2. Open a Custodial Roth IRA the Right Way
Minors can’t sign brokerage agreements, so a parent or guardian opens a custodial Roth IRA (sometimes branded “Roth IRA for Kids”). The account is owned by the child, with an adult custodian controlling it until the age of majority. You’ll typically need the child’s SSN, custodian info, employment details (if asked), and a funding source. Most major brokers can open these accounts online in minutes; the custodian is responsible for oversight and must transfer control when the child reaches the state’s legal age under UTMA/UGMA rules. Fidelity
2.1 How to do it
- Compare brokerages on fees, minimums, custodial transition process, and fractional shares availability.
- Gather SSNs, addresses, and bank details for ACH.
- Title the account correctly as a custodial Roth IRA for the minor.
2.2 Numbers & guardrails
- The age of majority (when control transfers) is typically 18 or 21, and some states allow extensions to 25. Verify your state’s rules.
Mini-case: A 16-year-old earns $3,100. A parent opens a custodial Roth IRA and funds $3,100 by April 15, 2026, for tax year 2026. The teen becomes full owner at 21 under state UTMA—no new account needed, just a title change when the custodian removes themselves.
Bottom line: Open a custodial Roth IRA with a broker that clearly documents UTMA/UGMA transition procedures and supports low-cost investing.
3. Get Self-Employment and Household Work Rules Straight
Teens often earn from gigs—babysitting, tutoring, yard work. For self-employment, filing requirements kick in at $400 or more of net earnings, triggering Schedule SE and self-employment tax. For household employees (e.g., a regular babysitter you direct in your home), the employer may owe FICA and need to issue a W-2 once wage thresholds are met. Teens under 18 working for their parents’ sole proprietorship may be exempt from FICA, but wage payments are still real wages and must be reasonable for the work performed. Understanding which bucket your teen is in prevents accidental noncompliance—and protects that Roth contribution’s legitimacy.
3.1 Tools/Examples
- Self-employed teen (lawn care): $1,200 revenue − $200 supplies = $1,000 net. Under $400? No SE tax; still report income as required. At $400+, SE tax applies via Schedule SE.
- Household employee (regular in-home babysitter): Family may have FICA and reporting duties once thresholds are met; see Publication 926. IRS
3.2 Mini-checklist
- Keep invoices, mileage (if applicable), and receipts for expenses.
- Use a separate teen bank account for work deposits.
- If working in someone’s home regularly, clarify employee vs contractor status up front.
Bottom line: Classify the work correctly and keep crisp records; it’s the backbone of a defensible Roth contribution.
4. Time Contributions for Maximum Lift (Know the Deadline)
You can fund an IRA for a given tax year from January 1 of that year until the federal tax-filing deadline the following year (no extensions). For example, a 2026 Roth contribution can be made until April 15, 2026 (date subject to IRS calendar). Contributing earlier maximizes compounding: a January deposit gets extra months or even a full year of market time compared to an April deposit the following year. If you overcontribute, fix it by the tax-return due date to avoid the 6% excise tax on excess amounts.
4.1 Why it matters
- The same dollars earn more when they’re invested sooner.
- The deadline flexibility is helpful for teens who finish earning late in the year.
4.2 Numeric example
- Invest $2,000 on Jan 1 earning 7%: after 40 years ≈ $29,800. Invest the same $2,000 15 months later (by the following April) and you lose a year of growth—ending ≈ $27,900. That “lost year” costs ~$1,900 on just one contribution.
Quick steps
- Set a monthly transfer during the job season (e.g., June–August).
- Contribute the rest by April once final earnings are known.
- If cash is tight, split into two deposits: mid-year and pre-deadline.
Bottom line: Contribute early when you can, but remember you have until tax day to finish funding.
5. Invest Simply: Diversification First, Costs Low
Once the account is open, the goal is broad, low-cost exposure with minimal tinkering. Teens have a multi-decade runway; a total-market index fund or ETF, or an age-appropriate target-date fund, provides instant diversification. Keep expense ratios low, automate contributions where possible, and avoid concentrated bets in single stocks or trendy themes. Use an index core (90–95%) and, if you want to keep interest alive, set aside a small “fun sleeve” (5–10%) for a diversified theme ETF or blue-chip stock—they’ll learn through ownership without risking the portfolio’s heart.
5.1 How to do it
- Choose 1 core fund (total U.S. market or global market) + optional 1 target-date alternative.
- Turn on automatic reinvestment of dividends and contributions.
- Revisit annually; otherwise, leave it alone.
5.2 Numbers & guardrails
- At 7% average annual return, every $1,000 added in the teen years can grow to roughly $15,000–$20,000 by age 60 (30–45 years of compounding). For a reality check or to test scenarios, use the SEC’s free Compound Interest Calculator.
Bottom line: Keep it boring, cheap, and diversified; consistency beats cleverness.
6. Use a “Family Match” (It’s Legal—If the Teen Earned It)
Parents and grandparents can “match” a teen’s contributions with gifts, as long as the teen’s earned income for the year is at least the amount contributed to the Roth. This isn’t an official IRS match—just a family funding tactic. It’s powerful because teens rarely earn enough to max out the IRA, and family dollars can turn modest teen earnings into a full-limit contribution. Always document the teen’s earnings, and keep the total at or below the lesser of the annual cap or earned income. The IRS even provides examples where relatives contribute on a young person’s behalf.
6.1 How to run it
- Teen earns $2,400; family gifts $2,400 to fund the Roth.
- If the teen also contributes $200 personally, the total is $2,400—not $2,600.
- Label bank transfers “2026 Roth IRA — Gift from [Name]” in the memo.
6.2 Mini-checklist
- Save the W-2/1099 or income log.
- Screenshot the custodial IRA contribution confirmations.
- Keep a yearly “Roth packet” in cloud storage.
Bottom line: A family match multiplies early dollars—just stay under the earned-income ceiling and the annual limit.
7. Know Withdrawal Rules and the 5-Year Clock
Roth IRAs are flexible, but rules matter. Contributions (the money you put in) can be withdrawn anytime, tax- and penalty-free. Earnings are different: to withdraw earnings tax-free, you generally must be 59½ or older and have met the five-year holding period; certain exceptions waive the 10% early-distribution penalty, such as up to $10,000 (lifetime) for a first-time home purchase and some education expenses (education waives penalty, not income tax on earnings). The IRS also applies ordering rules: withdrawals come from contributions first, then conversions, then earnings. Understanding this prevents accidental taxes or penalties later.
7.1 Numbers & guardrails
- Qualified distribution (earnings): 59½ + 5 years (or disability, death, or first-home up to $10k).
- Ordering rules: Contributions first, so emergency access typically doesn’t trigger taxes. Details in Pub. 590-B.
7.2 Mini-case
- At 24, a saver withdraws $2,000 from a Roth that has $5,000 contributions and $800 earnings. The $2,000 comes from contributions—no tax, no penalty. Earnings remain untouched.
Bottom line: The Roth is flexible, but earnings have strings; learn the 5-year rule and exceptions so you don’t pay avoidable penalties. IRS
8. Pick Investments and Providers With Fees and Transitions in Mind
For a teen account, two things matter beyond the fund lineup: fees and the custodial-to-adult transition. Prefer brokerages with no annual IRA fees, broad commission-free ETF access, fractional shares, and a written process for transferring ownership when the child hits the age of majority. Also confirm whether dividend reinvestment (DRIP) is available on ETFs and whether automatic investing is supported for ETFs or just mutual funds. Finally, check whether the provider allows a smooth retitling of the account to the young adult with history preserved.
8.1 Mini-checklist
- Fees: $0 annual IRA fee, $0 trade commissions on core ETFs.
- Tools: Automatic contributions, DRIP, fractional shares.
- Transition: Written process and timeline; confirm whether your state allows extension to 25 and how the firm handles it.
8.2 Why it matters
- Lower fees compound like returns.
- A clean, timely ownership transfer protects the teen’s rights and avoids administrative friction later.
Bottom line: Choose a platform that’s cheap now and seamless later.
9. Understand Taxes for Teens (W-2, 1099, and “Do I Need to File?”)
Roth contributions are made with after-tax dollars, so there’s no deduction now. Whether a teen must file a tax return depends on income type and amounts. Teens with W-2 wages below filing thresholds may not need to file—but filing can reclaim any withheld income tax. Teens with self-employment net earnings of $400+ must file and generally owe SE tax. Household employees may receive a W-2 from the family that hired them once wage thresholds are hit. The key: filing status doesn’t control Roth eligibility—earned income does—but clean filing helps substantiate contributions.
9.1 How to simplify
- Use a basic income/expense spreadsheet and save every form (W-2/1099).
- If self-employed, set aside 20–30% of net earnings for taxes as a rough rule of thumb.
- If a refund is expected, file early and direct-deposit it—then funnel part into the next year’s Roth contribution.
9.2 Guardrails
- Don’t count gifts/allowances as earned income for Roth eligibility. IRS
- When in doubt, check IRS filing thresholds for dependents and SE income each year.
Bottom line: Filing correctly isn’t just compliance; it’s part of maintaining a clean, defensible Roth paper trail.
10. Coordinate With Family Businesses (Powerful—But Follow the Rules)
If a child legitimately works in a parent-owned sole proprietorship (or a partnership where both partners are the child’s parents), wages paid to the child under age 18 are not subject to Social Security and Medicare (FICA), and under age 21 are not subject to FUTA. The work must be real, the wage reasonable, and the business must run proper payroll (including income-tax withholding as applicable). This setup can be a tax-efficient way to pay teens for bona fide work and seed their Roth IRA—just ensure it’s documented like any other hire.
10.1 Mini-checklist
- Create a job description (filing, inventory, social media, cleaning, etc.).
- Track hours, tasks, and pay rates.
- Run payroll through your normal system; issue a W-2; keep records for at least 3–7 years.
10.2 Example
- A sole proprietor pays a 16-year-old $3,500 to digitize inventory and clean the shop. No FICA/FUTA due under the family rules; teen reports wages and can fund up to $3,500 to the Roth.
Bottom line: Family businesses can combine real-world skills, tax efficiency, and Roth funding—only when documented properly.
11. Use Simple, Memorable Goals to Teach Compounding
Teens are more motivated by visible progress than abstract charts. Borrow the “$1k Blocks” idea: every time the Roth balance passes another $1,000, celebrate and note the date. Tie goals to predictable earnings (e.g., $250/month across a summer job). Show the long-term impact using the SEC Compound Interest Calculator; let them tweak return assumptions and contribution schedules to see how early dollars dominate. This keeps investing fun without turning the account into a trading sandbox.
11.1 Mini-checklist
- Print a one-page goal tracker with $1k milestones.
- Review the account together quarterly.
- For engagement, allow a small 5–10% fun sleeve alongside the diversified core.
11.2 Numeric example
- Contribute $150/month from ages 16–18 (36 months): total $5,400. At 7%, left untouched to age 60, that slice alone can grow to around $58,000–$65,000.
Bottom line: Make compounding tangible; consistency wins because time does the heavy lifting.
12. Plan the Handoff at Age of Majority (and Keep Records Forever)
Eventually, the custodian must transfer control when the child hits the age of majority (or the age specified in the custodial agreement). Some states and custodial documents permit extending to age 25; understand your state’s options before you open the account. Before the handoff, review the investment plan, turn on alerts, and confirm beneficiary designations. After the transfer, encourage the new adult owner to set auto-contributions from their first W-2 job and keep using the same diversified core.
12.1 Transition checklist
- 90 days out: Confirm the broker’s retitling steps and required IDs.
- 60 days out: Review asset allocation; consolidate stray holdings.
- 30 days out: Submit forms; verify email/phone on file belong to the young adult.
- After transfer: Enable 2FA, update beneficiaries, and set an annual portfolio check-up date.
12.2 Records to keep
- Contribution confirmations, year-by-year.
- Earnings documentation (W-2/1099/invoice log).
- Copies of tax filings when applicable.
Bottom line: A smooth, well-timed handoff turns a parent-guided project into a confident, independent investor.
FAQs
1) What exactly counts as “earned income” for a teen’s Roth IRA?
Taxable compensation such as wages, salaries, tips, and net self-employment income. Chores paid by parents without formal employment and gifts/allowances do not count. If a teen is self-employed, they owe SE tax when net earnings reach $400+, and they should keep invoices and expense records. IRS
2) Do parents’ incomes affect a minor’s Roth IRA eligibility?
No. Eligibility is based on the account owner’s modified AGI. For kids, their income is typically well below phase-out thresholds. (For context, the IRS sets annual phase-outs; check current ranges if your teen has unusually high income.)
3) Who can put money into the child’s Roth IRA?
Anyone—parents, grandparents, relatives—can fund it, but total contributions cannot exceed the child’s earned income for the year or the annual cap. The IRS explicitly notes that a grandparent can contribute on a student’s behalf, provided the compensation exists.
4) What’s the deadline to fund a teen’s Roth IRA for a given year?
Generally the federal tax-filing deadline of the following year (no extensions). For now contributions, that’s expected to be mid-April 2026; verify each year’s exact date. IRS
5) Can a teen withdraw money before retirement?
Contributions can be withdrawn anytime tax- and penalty-free. Earnings are subject to the 59½ + 5-year rule, with certain penalty exceptions (e.g., up to $10,000 for a first-home purchase; education expenses waive the penalty but not income tax on earnings).
6) My child babysits. Are they self-employed or a household employee?
It depends. A one-off gig arranged by the teen often looks like self-employment; regular in-home work under a family’s direction may be household employment, which puts payroll obligations on the family hiring them. Classification affects taxes and paperwork; see IRS Topic 756 and Publication 926. IRS
7) Can a child working in a parent’s business skip payroll taxes?
In some cases, yes: wages paid to a child under 18 in a parent’s sole proprietorship (or a partnership of both parents) aren’t subject to FICA; FUTA doesn’t apply until 21. Income-tax withholding rules still apply. Keep thorough records and pay reasonable wages for real work.
8) What investments should we choose inside the Roth?
For simplicity and resilience, anchor with a broad market index or a target-date fund, reinvest dividends, and keep costs low. Add a small “fun sleeve” if it keeps the teen engaged, but avoid turning the account into a trading game. Use the SEC calculator to visualize growth.
9) What happens when the child turns 18 or 21?
The custodian must transfer control at the age of majority specified by state law or the account agreement; certain states allow an extension to 25. Ask your brokerage about its retitling process well before the birthday. FINRA
10) What if we accidentally overcontribute?
Contact the brokerage to remove the excess (and any allocable earnings) by the tax-return due date to avoid a 6% excise tax. Keep the correction confirmation with your records.
Conclusion
Teaching a young person to earn, save, and invest through a Roth IRA builds two priceless assets: decades of tax-free growth and a durable money mindset. The playbook is straightforward: confirm earned income, open a custodial Roth IRA, keep clean records, and invest with low-cost diversification. Use a family match to magnify modest teen earnings, learn the withdrawal rules to stay penalty-free, and plan for a smooth custodial handoff at the age of majority. Along the way, celebrate milestones and let small, deliberate habits compound. Do this well, and a few thousand dollars in the teen years can snowball into a meaningful retirement cushion—plus the confidence to keep going. Next step: pick a brokerage, gather documents, and fund the first contribution this week.
References
- Retirement Topics — IRA Contribution Limits, Internal Revenue Service. IRS
- Publication 590-A: Contributions to Individual Retirement Arrangements, Internal Revenue Service. ; https://www.irs.gov/pub/irs-pdf/p590a.pdf IRS
- Publication 590-B: Distributions from Individual Retirement Arrangements, Internal Revenue Service. ; https://www.irs.gov/pub/irs-pdf/p590b.pdf IRS
- 401(k) Limit Increases to $23,500; IRA Limit Remains $7,000, IRS Newsroom (Nov. 1, 2024). IRS
- Roth IRAs — Overview, Internal Revenue Service. IRS
- IRA Year-End Reminders, Internal Revenue Service. IRS
- Retirement Plans FAQs Regarding IRAs, Internal Revenue Service. IRS
- Family Employees, Internal Revenue Service (Oct. 9, 2024). IRS
- Tax Treatment for Family Members Working in the Family Business, IRS Newsroom (date as published on site). IRS
- Instructions for Schedule SE (Form 1040), Internal Revenue Service. IRS
- Topic No. 756 — Employment Taxes for Household Employees, Internal Revenue Service. IRS
- Regulatory Notice 20-07: UTMA/UGMA Accounts, FINRA (Feb. 27, 2020). FINRA
- UTMA/UGMA — Age of Majority Extensions (State Examples), FinAid. Finaid
- Compound Interest Calculator, U.S. Securities and Exchange Commission, Investor.gov (current tool). Investor
- IRA Contribution Deadlines, Vanguard (Nov. 8, 2024). investor.vanguard.com
