Any child with earned income can have a Roth IRA. A parent opens a custodial Roth, the child contributes up to their earnings or the annual limit, several thousand dollars adjusted annually, whichever is smaller, and the money grows untaxed for life. Contributions go in at a teenager's tax rate, which is usually zero, and qualified withdrawals decades later come out tax free. There is no age minimum. The only ticket is a real paycheck.
Pick up where Priya's story left off. She is sixteen, running social media for her dad's landscaping company, with $14,000 of real, documented wages for the year. Her federal income tax on it: zero, covered by the standard deduction. Which means the money going into her Roth this year was essentially never taxed on the way in, and under the Roth rules it will not be taxed on the way out. Both doors, open at once. That combination exists almost nowhere else in the code, and it belongs to teenagers.
Walt opens a custodial Roth IRA for her, which takes about fifteen minutes at any major brokerage. Priya contributes $7,000, the annual limit for the year in this illustration, and invests it in a plain index fund. Then the family does the hardest part of the entire strategy: nothing, for forty-four years.
Markets do not promise 8%, and no honest page pretends otherwise. What the math does promise is the shape: dollars invested at sixteen have roughly three more doublings ahead of them than the same dollars invested at forty-five. Time is the ingredient money cannot buy, and a teenager is rich in it.
The rules in plain English
- Earned income only. Wages from the family business, the ice cream stand, the lifeguard chair. Allowance and birthday money do not count.
- The contribution is the smaller of the child's earnings or the annual limit, which adjusts annually. Your CPA or the brokerage will have the current number.
- A parent opens and oversees the custodial account until the age of majority in your state; then it becomes the child's outright.
- Here is a detail parents love: the child can keep the paycheck and the parent can gift the contribution amount, as long as the child's earned income covers what goes in. The account does not care whose dollars arrived, only that the earnings existed.
- Contributions can be withdrawn anytime without tax or penalty. Earnings are the part that must wait for the qualified rules, generally age 59 and a half plus the five-year clock, with limited exceptions your CPA can walk through.
No earned income means no contribution, and inventing wages to create eligibility unravels both strategies at once. Contribute past the limit and the excess gets penalized every year until it is fixed. And pulling earnings out early can trigger tax plus a penalty. The account is patient; the rules are not.
The mistakes that get people in trouble
- Funding a Roth for a child with no documented earnings. The payroll file from the hiring-your-kids strategy is the foundation this account stands on.
- Contributing more than the child earned that year.
- Leaving the money in cash. An uninvested Roth is a very patient checking account.
- Raiding earnings early for something a savings account should have covered.
Your three moves this month
- Confirm the child's earned income is real and documented: W-2 or clean payroll records.
- Open the custodial Roth at a major brokerage and set the contribution against this year's earnings.
- Invest it plainly, automate what you can, and put the account away where nobody checks it every week.
Questions parents actually ask
Your kid's account is built and compounding. Yours should be too, and for most business owners the biggest untapped account is the building itself: $200,000 to $450,000 per million sitting unclaimed inside the property. You found the money in a paycheck and a patient decade. Now send the engineers into the buildings that pay you rent.
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