Your teenager spent the summer cleaning pools, mowing lawns, or working a register. They earned, let’s say, $1,200. Most of it is already gone, and that’s fine — it’s their money and they did the work to get it. But if some of it lands in a Roth IRA in their name and you don’t touch the account again, that contribution is the single highest-leverage financial gift you can give them.
Four summers of that habit, untouched for the rest of their working life, becomes more than what most adults retire on.
Four summers of work become $124K by 65.
A single Roth IRA, funded across the four summers of high school, then left alone. The four small contributions barely show on the chart; the curve does the work.
Four contributions. Total in: $4,800. Balance at 65: $124K. The other ~119K is what the time did.
The reason it works isn’t a trick. It’s the two things a Roth IRA does for a saver who has 50 years before they need the money: every dollar of growth is tax-free, and there’s nothing in the way of that growth except time. A teenager has more time than anyone.
What a custodial Roth IRA is
A custodial Roth IRA is a regular Roth IRA opened in your child’s name, with you as the custodian until they reach the age of majority (18 or 21, depending on your state). The contribution rules are the same as any other Roth: after-tax dollars in, tax-free growth, tax-free withdrawals in retirement. The custodial part is just an administrative wrapper — you manage the account on their behalf until they’re old enough to manage it themselves.
The IRS doesn’t have a separate “kids’ Roth” with its own rules. It’s the same Roth IRA, available to anyone with earned income.
The make-or-break rule: earned income
A Roth IRA contribution requires earned income. This is the rule that catches most parents off guard, and getting it wrong can mean undoing contributions later. Two things are worth being precise about:
What counts:
- W-2 wages from a real job — the summer-camp counselor, the grocery bagger, the lifeguard.
- 1099 self-employment income — babysitting, lawn care, tutoring, dog-walking, an Etsy shop, freelance design. The income is real even when no employer files a W-2.
- Any other compensation reported as earned income for tax purposes.
What does not count:
- Allowance, birthday money, gift money from grandparents.
- Investment income — interest, dividends, capital gains in a brokerage or savings account.
- Scholarship money, even when it covers more than tuition.
The teen’s annual contribution can be any amount up to whichever is smaller: their earned income for the year, or the IRS annual limit.
Maximum contribution per year
So if your teen earned $1,200 this year, the maximum Roth contribution is $1,200 — not $7,500. If they earned $9,000, the maximum is $7,500. The earned-income cap binds for almost every teen.
You can fund it for them
This is the misconception that keeps the most parents from doing this: many believe the IRS requires the contribution to come from the teen’s own bank account. It doesn’t. The IRS requires the account holder to have earned income; it does not regulate where the contribution dollars come from. The same legal principle lets a working spouse fund a non-working spouse’s IRA — the income belongs to the account owner, the cash can come from anywhere.
So the simplest setup is the most common one: the teen earns money and spends it on what teens spend money on; you contribute an equivalent amount (up to their earned-income cap) into the Roth on their behalf. The teen keeps their summer money. The Roth gets funded. Everyone wins, no rule is broken.
You’re not gifting them retirement money. You’re matching their work, the way an employer would. Their earned income unlocks the contribution; you supply the cash. They keep their paycheck for now; the Roth gets the long horizon.
How to open one
Three major brokerages offer no-minimum, no-fee custodial Roth IRAs that are well-suited for this: Fidelity, Schwab, and Vanguard. The setup process is similar at all three — you open the account in the teen’s name, list yourself as custodian, fund it from a linked bank account, and pick what to invest in.
Two things to confirm during setup:
- No account minimum and no recurring fees. All three brokerages above qualify. Apps that charge a monthly fee on a small balance will eat the return; skip them.
- Index-fund access without a transaction fee. A target-date index fund or a broad-market index fund should cost nothing to buy.
That’s the whole list. Open the account in an evening; fund it once for the year; move on.
What to invest in
Two reasonable defaults, both fine:
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A target-date index fund matched to roughly the year the teen turns 65. For a 16-year-old in 2026, that’s a 2075 target-date fund. The fund handles its own allocation and rebalancing across the decades. One purchase, set-and-forget.
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A broad-market index fund — total US stock market or S&P 500. Simpler, slightly more aggressive (no automatic bond glide path). At this horizon, the difference is academic.
The thing that matters more than the choice between these two: actually invest the money. A custodial Roth IRA funded with $1,200 and left in cash earns close to nothing. The compounding curve only happens once the dollars are in the market.
Keep simple records of the earned income
The IRS rarely audits teen Roth contributions, but if they do, the only thing they want to see is proof the earned income existed. For W-2 jobs the proof is automatic — the employer files the form. For 1099 or cash work (babysitting, lawn care, tutoring), keep a one-page log:
- Date of the work
- Who paid (the family, the customer, the platform)
- Amount
A note in a Google Doc is enough. If their net self-employment earnings reach $400 in a year, they file Schedule SE and owe self-employment tax — that’s the Social Security and Medicare portion (15.3%) that a W-2 employer would normally split with them. Schedule C reports the underlying business income. Federal income tax usually isn’t owed at these levels, but the SE tax is separate from income tax and isn’t waived by the standard deduction. On $1,200 of net self-employment income, the SE tax comes to about $170 — small, but worth knowing it exists.
Plug in any contribution amount and number of years. Useful for showing your teen what their own number would look like — different summer earnings, different ages, different time horizons.
Open the calculatorIt’s their money — and that’s the point
Both legally and practically, every dollar in the custodial Roth is your child’s. You’re the custodian, not the owner. When they reach the age of majority in your state, the account converts to a regular adult Roth IRA in their name. They can withdraw their contributions at any time, penalty-free; the growth keeps compounding until 59½ for the full tax-free benefit.
The temptation, for some parents, is to keep the account secret until adulthood — “let it be a surprise.” Resist that. The teaching is most of the gift. A 17-year-old who watches the balance grow across four summers, sees the chart you just looked at, and understands what compound math actually does — that 17-year-old becomes a 25-year-old who funds their own Roth without being asked. The habit is what compounds across the generations, not the dollars.
Four summers of work. The rest is time.