The custodial Roth IRA: a working teen's retirement head start

There is a quiet, legal way to hand a teenager a six-figure retirement head start using a few thousand dollars of summer-job money. It's called a custodial Roth IRA, and it exploits the one advantage a 16-year-old has that no adult can buy back: five decades of compounding. Most families never open one, usually because nobody told them a minor could own a retirement account at all. They can — with one condition.

The one requirement: earned income

A Roth IRA — at any age — can only be funded from earned income: wages from a job, self-employment from mowing lawns or babysitting, anything reported as work. Allowance, birthday money, and investment gains don't count. So the gate is simple: if your teen earned money from actual work this year, they can contribute up to the amount they earned, capped at the annual IRA limit (around $7,000 in recent years — check the current IRS figure). A kid who earned $2,400 lifeguarding can put in up to $2,400.

Why teenage dollars hit so hard

The magic is entirely about runway. A dollar invested at 16 has roughly 49 years to compound before a traditional retirement age; a dollar invested at 40 has about 25. At a 7% average return, money roughly doubles every decade — so the teenage dollar doubles two or three more times than the mid-career one. That's why a small pile of money contributed in high school can end up worth more at 65 than much larger sums contributed decades later.

Why a Roth, specifically

• Teens are almost always in a very low or zero tax bracket, so the up-front tax deduction of a traditional IRA is nearly worthless to them — but the Roth's tax-free growth over 50 years is enormously valuable.
• Roth contributions (not earnings) can be withdrawn anytime without tax or penalty, so the account isn't a total lockbox if a genuine need arises.
• Roth funds can later help with a first home or qualified education under specific rules — flexibility that eases the 'but it's locked until they're old' worry.
• The account is the child's own, held in a custodial Roth until they reach the age of majority in your state, when it becomes theirs outright.

How to set it up

1. 1
   Confirm and document the earned income

   Keep it simple and real: a W-2 job is easiest, but self-employment counts if you log the work and payments. You want a defensible record of what the child earned.

2. 2
   Open a custodial Roth IRA

   Most major brokerages offer one at no cost. The parent is the custodian who manages it; the child is the beneficial owner.

3. 3
   Contribute up to earned income (or the annual cap)

   Fund it from the kid's money, your money, or a match — whichever gets it funded. Don't exceed the amount the child actually earned.

4. 4
   Invest it simply and leave it alone

   A broad, low-cost stock index fund is the classic choice for a multi-decade horizon. The teaching moment is watching it, not trading it.

The bottom line

If your teenager earns money, a custodial Roth IRA is one of the highest-leverage financial moves available to a family — a few thousand dollars now, funded however is easiest, growing tax-free for half a century. Match their contributions to make it a game, invest it simply, and let time do the rest. It's a retirement gift that costs you little and teaches them that money put to work early works hardest. This is general education, not individualized advice — confirm the current contribution rules with the IRS or a tax professional.