Most kids, whether preteen or young adults, aren’t thinking about retirement. They’re busy with school, sports, extracurriculars, friends, and what comes next. Retirement can feel like a lifetime away to them, which is exactly why starting the conversation now can make such a difference.
Starting early is the single biggest advantage an investor can have. Parents, grandparents, relatives, or even family friends can help give children a head start and set them up for success.
One of the simplest ways to do that is with a custodial Roth IRA, a retirement account that allows your child to start building savings early, as long as they have earned income.
Why a Roth IRA Works So Well for Kids
A Roth IRA is straightforward. You contribute earned income that’s already been taxed, the account grows over time, and qualified withdrawals in retirement are completely tax-free.
This structure can be especially powerful for children, who often fall into low or even zero federal income tax brackets. This means that the cost of paying taxes upfront on contributions to a Roth IRA is minimal.
Starting early gives contributions decades of tax-free compounding. Because most kids have relatively low earned income, they are locking in a lifetime of tax-free growth at the cheapest possible moment.
A Simple Example
Consider a child earning income from a summer job, such as lifeguarding or working at a restaurant.
If that child earns a few thousand dollars, they become eligible to contribute to a Roth IRA. Because their income is low, they may owe little to no federal income tax, making Roth contributions especially tax efficient. If even a portion of that income is invested, it can remain in the account for decades, growing tax-free the entire time. The earlier the contributions are made, the longer they benefit from compounding, meaning a dollar invested at age 15 has significantly greater long-term potential than one invested later in life.
How Custodial Roth IRA Accounts Work
To open a custodial Roth IRA account, the child must have taxable earned income reported to the IRS. This income generally takes one of two forms.
The first is formal W-2 employment. At year end, the employer issues an IRS Form W-2 summarizing total earnings and the exact taxes already paid. Examples include working at a grocery store or refereeing local youth sports.
The second is 1099 self-employment income, which the child earns working independently rather than for an employer. Common examples that qualify a minor include babysitting, pet sitting, or mowing lawns. The income must come from actual work performed, so allowances and cash gifts do not qualify.
It’s important to note that if the child is self-employed, they will owe self-employment tax once net earnings reach $400, which covers Social Security and Medicare. This applies regardless of age, meaning a minor may owe the tax even if no federal income tax is due. Consider consulting a tax professional or CPA if you have questions.
Contributions and Withdrawals
Each year, you may contribute the lesser of your child’s earned income or the annual IRS limit ($7,500 in 2026). For example, if your daughter earns $1,000 from a summer job, up to $1,000 can be contributed to her Roth IRA for the year—regardless of who provides the funding, meaning she could keep her earnings while a parent or grandparent contributes on her behalf.
To withdraw the investment earnings completely tax-free, the Roth IRA account must be at least 5 years old, and the beneficiary must be age 59 ½ or older, or meet another qualifying exception (disability, qualified first-time home buyer, or death). However, the actual contributions do not have to wait 5 years, since the beneficiary has already paid taxes on this money. Contributions can be withdrawn at any time, completely tax- and penalty-free.
The Value of Saving Early
The real edge in building wealth isn’t picking the right investment. It’s starting early. Time does most of the heavy lifting, allowing investments to compound and grow on their own.
Consider a 15-year-old who earns $1,000 from a part-time job and contributes it to a custodial Roth IRA. At an 8% annual return, that single contribution could grow to roughly $20,000 by retirement without adding another dollar. Now imagine making similar contributions for several years. A few small contributions early on can quietly turn into a meaningful foundation over time, simply by letting compounding do its job.
Making the Case to Children
Most children are unlikely to choose retirement savings over spending money on things they enjoy today, like a trip to the movies or the latest pair of sneakers. The good news is that there are some alternative ways to encourage the child to invest in their Roth IRA account.
One approach is to treat contributions as a reward for working. For example, after your child earns money from a job, you can contribute an equivalent amount to their Roth IRA on their behalf, allowing them to keep their earnings while still benefiting from investing. Another option is a simple match, where the child contributes a portion of their income and you match it, reinforcing both saving and long-term thinking.
Even if your children aren’t enthusiastic about retirement savings today, a Roth IRA can teach valuable financial habits and the importance of saving for long-term goals.
Ready to build a comprehensive savings strategy for your children tailored to your unique financial situation? Reach out to our team today.
Presented by Michael Lynott and Isabella Che
