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Starting a Roth IRA for a Teen
Giving your child or grandchild a financial head start can be one of the most impactful gifts you provide. A Roth IRA is a powerful tool to help teens learn about saving and investing while setting them up for long-term financial success. Here’s what you need to know about starting a Roth IRA for a teenager.
What Is a Roth IRA?
A Roth IRA is a type of individual retirement account that allows contributions with after-tax dollars. While contributions are not tax-deductible, qualified withdrawals in retirement are tax-free. This makes it an excellent vehicle for long-term savings, especially for young individuals who are likely in a lower tax bracket now than they will be in the future.
Rules for Setting Up a Roth IRA for Teens
Earned Income Requirement
To open a Roth IRA for a teenager, they must have earned income. This includes wages from jobs such as babysitting, lawn care, or part-time employment. For example, if your teen earns $7,500 in a year, they can contribute up to $7,500 to a Roth IRA, which is the maximum annual contribution limit for 2026. However, contributions cannot exceed their total earned income for the year.
Gift Tax Considerations
Parents or grandparents can fund the Roth IRA on behalf of the teen, as long as the contribution does not exceed the teen’s earned income. These contributions can also count as part of your annual gift tax exclusion, which is $19,000 per individual or $38,000 for a married couple in 2026.1
Benefits of Starting Early
Compound Interest and Long-Term Growth
One of the most significant advantages of starting a Roth IRA early is the potential for compound interest. By contributing to a Roth IRA during their teenage years, your child can benefit from decades of growth. Even small contributions made early can grow substantially over time, thanks to compounding.
Financial Education
Setting up a Roth IRA for a teen is also an excellent way to teach them about financial concepts like saving, investing, and the power of compound interest. This hands-on experience can help them develop healthy financial habits that last a lifetime.
Withdrawal Rules and Flexibility
Early Withdrawal Penalties
Roth IRAs are designed for retirement savings, so withdrawing money before age 59½ typically incurs a 10% federal tax penalty. However, there are exceptions to this rule. For instance, up to $10,000 of investment earnings can be withdrawn penalty-free if the funds are used to purchase a first home.2
Other Exceptions
In addition to first-home purchases, Roth IRA funds can also be used for qualified education expenses or in the event of the account owner’s death. However, to qualify for tax-free and penalty-free withdrawals of earnings, the account must meet a five-year holding period, and the withdrawal must occur after age 59½.3
Setting Up a Custodial Roth IRA
Custodian Responsibilities
When opening a Roth IRA for a minor, it is typically set up as a custodial account. As the custodian, you manage the account until the child reaches the age of majority, which varies by state. At that point, the account transitions to the teen’s control.
State and Federal Regulations
Each state has its own rules regarding custodial accounts, so it’s essential to understand the specific regulations in your state. Consulting a tax professional can help ensure compliance with both state and federal laws.
Key Considerations
Professional Guidance
Before setting up a Roth IRA for your teen, consult a tax professional to ensure you understand the rules and potential implications. This is especially important if you plan to make contributions on their behalf or if the funds may be used for purposes other than retirement.
Long-Term Impact
While a Roth IRA is an excellent tool for teaching financial responsibility and building long-term wealth, it’s important to remember that the account is ultimately the teen’s asset. Once they take control, they can decide how to use the funds.
External Links
- Investopedia: Roth IRA Rules
- IRS: Roth IRA Contribution Limits
- IRS: Early Withdrawal Exceptions
- FMG Suite: Financial Education Resources
This article is for informational purposes only and should not be considered tax or legal advice. Always consult a qualified professional for guidance tailored to your specific situation.
