How to Open a Roth IRA For Children

What was the first job you held as a teenager? I worked a few side hustles as a young teen, but began my first official job just after turning 16 years-old. It was at a Little Caesar’s (“pizza, pizza”) in my hometown, and I worked there my sophomore year of high school until football practice began the next summer. It was a pretty good job for a teenager–making pizzas, answering the phones occasionally, and all the Crazy Bread I could eat! Too bad I spent nearly everything I earned that year.

Today parents and working children have access to one of the best investment vehicles around, the Roth IRA. That’s right; you don’t have to be an adult to contribute to a Roth IRA, you just have to have an earned income. Parents may need to help set up the account by opening it as a custodial account. The only limitation for contributions is that they must not exceed the maximum contribution amount established for Roth IRAs in a given tax year, or the teens earned income, whichever amount is lesser.

How To Open a Roth IRA for Children

Let’s assume your 13 year-old makes $2,000 mowing lawns, raking leaves and babysitting this year. Assuming he invests that $2,000 in a Roth IRA, and leaves the money alone, it will grow to $284,000 by age 65, also assuming an average 10% return (source: Fool.com). Not too bad! And just imagine what that number could look like if your teenager continued to invest a couple thousand dollars in that Roth IRA throughout high school. He would easily become a millionaire by retirement age. Wish someone had told me that at 13!

The IRS requires proof of earned income to qualify for contributing to a Roth IRA for children. If your child works for an established organization, he or she should receive a W-2 at the end of the tax year showing how much they earned. If one of your children earns money from babysitting and odd jobs, you will need to keep up with the amounts earned and file a tax return, even if the amount is less than the required minimum for filing. This return is your certification that she did earn that money, and is eligible for a Roth IRA.

Matching Funds From Family

One great gift idea is for family members to match their teenager’s earnings and make the contributions for them. This way all of the teen’s earnings aren’t sent off to the brokerage, and they get to enjoy what they earn.

I actually like some combination of earnings and matching plans for Roth IRA contributions. For example, if a teenager earns $1,000 this year on a paper route, require that $500 be saved for Roth IRA contributions and offer to match the remaining $500 to reach the maximum eligible contribution amount. A matching plan forces the teen to continue to put aside some earnings toward future savings; a skill that is sorely needed from our next generations.

What If They Need the Roth IRA Money Before Retirement?

Roth IRA withdrawal rules allow you to withdraw contributions to a Roth IRA at any time, without penalty. So, if you help one of your children open a Roth IRA, and they need access to that money in their college years, they can always withdraw the contributions, but not the earnings, penalty free. But remember, it’s best to leave the money in your Roth IRA unless children really need it in an emergency.

Comments

  1. What a great idea! We so often just think of paying for college, but with a Roth IRA, you can get your kids started down the road to financial freedom.

  2. The Roth IRA wasn’t around when I was a teen, and I don’t have kids of my own to do this for. However, my first contributions to my Roth were made when I was in an absurdly low tax bracket. Since the Roth IRA was an after-tax investment, I was able to put money into that account after paying almost no taxes on it at all. It seems to me that this would still apply to teens, college students working part-time, or anyone making very little money.

    Paying almost no taxes to get your money – legally – into a tax-paid account is a great deal. And most people are only going to get a small window of opportunity in their lifetime to do that: when they’re hardly making any money in the first place.

  3. Thank you for this post. I am big on paying yourself first and investing for the long term. My daughter (15yo) “contributed” to her ROTH last tax year all that she earned: $1,250. I had her contribute 1/2 of her own money and I match to the total. One word of caution: it is more and more difficult to find ROTH IRA’s for minors at brokerages. Fidelity could not accomodate, nor could Vanguard….Scott Trade did.

  4. I wish students and parents understood the power of compound interest! When I speak at events, I tell students that if you can grasp the concept of “delayed gratification,” you will be loaded someday. But that means sacrificing today in order to win tomorrow and that’s difficult for all of us…young and old.

  5. I am trying to teach my kids to learn to be savers. But it seems like there is always something they want to buy. Maybe this kind of info can be a motivator for them. Afterall even a 7 year old understands if you save now, you will have a million dollars then!

    Paul
    http://www.todayisfun.com/blog

  6. OMG! I worked at Little Caesars too! It was during the summer right after high school and I was earning money to go to college. This was before I found out that I qualified for a Pell Grant which paid for all of my tuition and some of my books. When I found that out, I told my idiot boss to “take this job and re-staff it!” I always got a kick out of him bragging that he had an accounting degree and he was making “good money” being a manager at Little Caesars — I later found out he was making only about $26K a year. Ha, I always knew I could do better by going to school and I am. Much better.

    Not to nitpick, but to think that getting your kid to contribute to a Roth IRA is helping them toward financial freedom is a little off. By the time they are able to access that money, they’d better be “financially free” or they are pretty far down the crapper by that time. You can’t access the money unless, you turn 59 1/2, you are trying to buy your FIRST home (limited to $10K), you become disabled or, you die. I’d say that the money is pretty well tied up until retirement. That’s a pretty sucky thing to do to a kid who is working hard for that money. I’m all for saving, but only get them to save some of that money, otherwise they will think that they are doing it all for nothing.

  7. The power of compounding surely does wonders, start early and often.

    I tend to agree with DavidK…when I was a teen, the thought of investing never occurred to me. I ended up socking away most of my earnings for college and that BARELY was enough to cover the first full year.

    Growing up, my parents didn’t do any investments for me but rather gave me savings bonds. I’ve been starting to cash them over the years after they’ve matured and I really enjoy the flexibility at my age.

    Stupidly Yours,

    Matt

  8. My parents always required me to contribute half of everything I made to an education fund. When it was time to buy savings bonds (the interest rate was really good back then) they added enough to round it up to the nearest $100. Since I started working when I was 13 that added up, and aside from food, letting me use my room a place to sleep, and access to a vehicle they didn’t have to contribute a cent toward my education. It worked out reasonably well for everyone, except I did a stupid thing and didn’t have my accounts in my name only, which gave them more control over my educational choices than was healthy.

  9. I really like this idea. My children (twin girls) are only 3, but we plan to do a “matching” savings plan with them when they’re older. It will get them in the habit of saving early on and will be a nice “bonus” for them when they’re ready to withdraw.

  10. I took a personal finance class in college and my professor suggested something similar, though not a Roth IRA. The investment he was talking about was designed for minors and is tax free up to a yearly limit but they have total access to when they turn 18. Do you know what this is?

    Maybe this would be a viable option for those who want their kids to access the money sooner.

  11. Wow, I never knew teenagers could have Roth IRAs, that is really a phenomenal savings tool. Now the only problem is convincing them that their income isn’t 100% disposable.

    I wish I would known about this when I was a kid. I would have taken all of my minimum wage Long John Silver’s money and put it away!

  12. For my three kids, from the time that they first had jobs and could have savings, we set them up with bank savings accounts. We offered them a “family 401k” with a matching – whatever they put in savings, we would match 100%. That way they could see their savings grow quickly and would be even more encouraged to save. We also told them that any withdrawals they made would be matched with an accompanying withdrawal of our match by us – of course we let it be known that such withdrawals would be frowned upon and since they were UTMA accounts, they didn’t really have the latitude to make such withdrawals. As they got older we preached about Roth IRA’s and all three have been fully funding Roth IRA’s since they were able to have taxable income. Two of them are now in college (senior and junior) and one is high school. They are all avid savers (well maybe the high schooler not so much) and all understand saving, mutual funds and index investing far greather than their peers.

  13. This is one of these things I wish I’d thought about when I was a teenager. Even if I had, though, I probably wouldn’t have put the money into a retirement account – I just didn’t understand the importance. The matching idea is a good one; it adds extra incentive.

  14. @DavidK: I agree with you, and that’s why advocated parents matching a portion of kids’ earnings so they don’t have to invest 100% into an investment vehicle they can’t touch for decades. Even asking them to set aside 10-20% could get them to develop a habit of savings early on that will pay off later on.

    @Kim: I’m not personally familiar with this investment vehicle, unless it is something that falls under the Uniform Gift to Minor’s Act. Anyone else familiar with what Kim is referring to?

  15. My parents opened a Roth for me through Edward Jones. When I was able to contribute myself, they allowed me choose what I wanted to fill it. It was a great opportunity for my parents to teach me about choosing investments, as well as teaching me to save.

  16. I think the Roth can be a great motivator as long as the teen has a choice in the amount he/she invests. A parent may insist on saving some of the money. The child might be given the choice of giving 25 or 35 of their earnings to the account.

  17. It does sound like a great idea, a lot of effort involved. I had side hustle ways of making money like you. Burning CD’s (illegal), shoveling snow, babysitting but how can you really keep track of all that? Seems difficult.

    Plus if a 13 yr old made 2K, that would be enormous, I think that’s a big overestimate. Even still, if they made that money, they also would probably want to save some of that for high school, maybe a car, vacation when older, or spending money. Of course parents will play a huge financial role, but it would be extreme for a teen to do that. It’s tough for post college grads to do that.

  18. I had a lot of jobs as a teenager and some of them paid well. I hated my three-dollar-an-hour slave (ahem, nanny) job. I didn’t buy a lot (it’s amazing how little you spend when you are busy working and studying!), but I did contribute to my schooling. I was homeschooled and wanted to take private lessons. The books were expensive – like college – so I had to help pay for them. I do regret not saving some, but I don’t regret paying for those classes. I thought it was smart at the time. That being said, when my son is old enough to get a job, I will encourage him to save a portion of it, even if he is helping to pay for something he wants to do that is helpful for his future.

  19. How would this interact with filing FAFSA for college financial aid. I know that that form requires the students total savings, and I believe they can require the student pay up to 20% of that amount (I think its also 5% of the parents savings). Would an IRA be included in that amount, even though the student can’t touch that money?

  20. Good info on the Roth for teenagers/grandkids. Thanks.

    Growing up, I HAD to save 50% of what I earned/received as a gift into a savings account – there was no negotiating with my folks on that :) It was a good lesson to learn very very early on!

  21. Tom (comment #3), I contributed to a Roth IRA with Vanguard for my son. There is no minimum age if you are the custodian when it is establlished. We started contributing when he started working. Through last year the 20K we put in the Vanguard 500 index fund is worth 13.7K now. We plan on putting in another 5K this year, through his 21st year and then he is on his own for contrubutions. We aren’t worried about the value now since he has about 40 years until he can touch it.

  22. In high school, one of the guys opened up an IRA and everyone thought it was ridiculous. At that age having a couple thousand dollars was a really big deal to us. Now, 15 years later, he is working at Edwards Jones.

  23. Both my husband and I opened Roth IRAs in high school – best thing we ever did! His parents matched, mine offered encouragement.

    We both contributed about 10-20% of our income during high school and college, and now have a significant nest egg for 20-somethings. It’s a great way to start our adult lives – a five-digit retirement fund!

    Ironically, we didn’t know the other was saving until we got married. Our parents are all older and near retirement, which I think is why they got us started on IRAs.

    Starting financial skills early in life is so important. From an early age, my parents encouraged me to set aside a bit from every gift that I received. Then once I started working, it was just natural to save some of my earned income, as well. I can see the exact opposite in my cousins – saving has never come naturally, and they spend at least every dollar that they earn.

  24. Looking back, I wish I would have started this sort of saving as a teenager! However, I think my parents would have been hard pressed to convince me that this was the way to go. I was a great saver and always understood the concept of compound interest, yet I’m fairly sure that saving for retirement would have seemed like such a far off and somewhat ridiculous choice for me at the time. Had my parents just done it, I would be thrilled and appreciative for a great start at my retirement savings, but I’m not sure it would have taught me anything other than that I had nice parents who wanted me to start saving for retirement.

    It’s a fabulous opportunity for kids who are a bit more forward-thinking than I was though!

  25. i have a son who attends the usaf academy. he earns about 900.00 a month.he started last july. they must pay for their computer, uniforms and misc. items. the first year most of their pay goes to pay for these items. he has made 900.00 a month for 6 months . i’m trying to teach him the value of saving when your young. i want to help him start a roth ira. so can i get him started for say 1000.00 dollars.

  26. The article currently says: “The only limitation for contributions is that they must not exceed the maximum contribution amount established for Roth IRAs in a given tax year, or the teens earned income, whichever amount is greater.” however that last word is a significant typo. It should say whichever is less.

    Otherwise you could make the $5k max contribution for a kid that only earned $10.

  27. Also another benefit is that since your teen only contributes $2000 to a Roth IRA (assuming he contributes all of what he has earned), he won’t be paying much in taxes now (what’s the taxes payable on $2000 income or even $3000 income)? However, the earnings he gets every year will be taxable, but assuming he won’t get a ‘proper job’ until he is 25, this already gives him a head start to his financial future. Your idea is brilliant.

    Tax advantages
    Contribution dollars may be withdrawn at anytime, tax and penalty tax free. Earnings on the account accumulate on a tax-deferred basis and can be withdrawn free from federal income taxes, provided that they are taken according to qualified distribution guidelines.
    Input: http://www.definerothira.com

    The Saver’s Credit may provide a tax credit for those who save for retirement. You may be able to take a credit of up to $1,000 – up to $2,000 if filing jointly. The credit is designed to help offset part of your first $2,000 contributed to a Traditional IRA, Roth IRA, SIMPLE IRA, or 401(k) account by reducing the amount of federal income tax you owe dollar-for-dollar, however it is not a refundable tax credit. The credit ranges from 10% to 50% of your contributions and is based on several factors including your filing status, adjusted gross income, and tax liability. Special rules apply. See http://www.irs.gov or your tax advisor for more information.

  28. This article is a great example of the powerful financial influence parents have on their children. Teaching children the habit of planning for the future is an essential skill in wealth building. Eventually your child will become an adult who will be grateful for head start in life. I love the idea that my nephew will have the opportunity to use his childhood savings to purchase his first home.

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