The Benefit of Roth IRAs for Kids
Terry Herr, CFP®
Most teenagers probably aren't thinking about saving for retirement, buying a home, or even paying for college when they start their first jobs. Yet a first job can present an ideal opportunity to explain how a Roth IRA can become a valuable savings tool in the pursuit of future goals.
Rules of The Roth
Minors can contribute to a Roth IRA as long as they have earned income and a parent (or other adult) opens a custodial account in the child's name. Contributions to a Roth IRA are made on an after-tax basis, which means they can be withdrawn at any time, for any reason, free of taxes and penalties. Earnings grow tax-free, although nonqualified withdrawals of earnings are generally taxed as ordinary income and may incur a 10% early-withdrawal penalty.A withdrawal is considered qualified if the account is held for at least five years and the distribution is made after age 59½, as a result of the account owner's disability or death, or to purchase a first home (up to a $10,000 lifetime limit). Penalty-free early withdrawals can also be used to pay for qualified higher-education expenses; however, regular income taxes will apply.In 2025, the Roth IRA contribution limit for those under age 50 is the lesser of $7,000 or 100% of earned income (unchanged from 2024). In other words, if a teenager earns $1,500 this year, his or her annual contribution limit would be $1,500. Other individuals may also contribute directly to a teen's Roth IRA, but the total value of all contributions may not exceed the child's annual earnings or $7,000 (in 2025), whichever is lower. (Note that contributions from others will count against the annual gift tax exclusion amount.)
Value of Compound Interest
Chart was generated using AI. Microsoft Copilot and for illustration purposes only. It is not reflective of any real world investment.
Lessons For Life
When you open a Roth IRA for a minor, you're giving more than just an investment account; you're offering an opportunity to learn about important concepts that could provide a lifetime of financial benefits. For example, you can help explain the different types of investments, the power of compounding, and the benefits of tax-deferred investing. If you don't feel comfortable explaining such topics, ask your financial professional for suggestions.The young people in your life will thank you — sooner or later.For questions about laws governing custodial Roth IRAs, consult your tax or legal professional. There is no assurance that working with a financial professional will improve investment results.
This content is developed from sources believed to be providing accurate information for educational purposes only. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. The content on this website is for informational purposes only and should not be construed as personalized investment advice. Please do not act upon any information provided here without seeking professional guidance from a qualified professional. This content has been reviewed by FINRA. Source: Broadridge Advisor Solutions. © 2025 Broadridge Financial Services, Inc.