A Roth IRA is one of the best investment vehicles out there to take advantage of tax FREE growth over the course of your lifetime.
A Roth IRA is not an investment itself, but an investment account with special tax advantages and yes, even kids can benefit from one.
When you start early, you’re giving money more time to grow through the power of compounding. And when that growth is tax free? The numbers become jaw dropping over time.
The Power of Tax-Free Compound Growth
Imagine this:
- Your child earns $2,500 per year babysitting, lifeguarding, or working a summer job from age 13 through college.
- You (or they) contribute that amount each year into a Roth IRA invested in a simple S&P 500 index fund.
- They never add another dollar after college.
By the time they turn 60, that account could be worth nearly $700K, all tax free, assuming an average annual rate of return of 8%.
That’s the magic of starting early. Small contributions in a Roth IRA today can become life changing amounts later.
Who Can Contribute to a Roth IRA?
There are two basic requirements:
- Earned Income – Your child must have some type of earned income, like wages, babysitting, dog walking, or working in a family business.
- Income Limits – Roth IRAs have income restrictions, but for kids this usually isn’t an issue since their earnings are low.
And here’s the best part: there’s no minimum age to open a Roth IRA. If they earn income, they’re eligible.
How Kids Can Earn Income to Fund a Roth IRA
Through Their Own Work
- Babysitting
- Dog walking or pet sitting
- Lawn care or shoveling snow
- Summer jobs, lifeguarding, tutoring, etc.
Parents can also make the Roth contributions as a gift, as long as the child has earned the income to justify it.
Through a Parent Owned Business
If you own a business, you may be able to employ your child and pay them a reasonable wage. Examples include:
- Stuffing envelopes or organizing supplies
- Helping clean or maintain office space
- Running small errands (post office, office supplies, etc.)
- Modeling for brand photos or merchandise
This not only provides income for your child but also creates a business tax deduction for you.
Opening a Custodial Roth IRA
To get started, you’ll need to open a Custodial Roth IRA on behalf of your child. Popular brokerages like Fidelity and Charles Schwab offer them.
Steps to open:
- Confirm your child has earned income.
- Open a Custodial Roth IRA account.
- Fund the account directly from your child’s earnings or as a parent contribution (up to the amount they earned).
- Choose simple, long term investments like index funds.
- Track contributions and keep good records of income.
What Happens Next?
- While your child is a minor, you control the account as the custodian.
- Once they reach adulthood (18 or 21, depending on your state), the account becomes theirs.
- They can withdraw contributions anytime tax and penalty free.
- To access the earnings, they’ll need to wait until age 59½ to avoid taxes and penalties.
This is by far one of the best ways to set your child up for future financial security and independence!
Bottom line: If your child has earned income, even just a few thousand dollars, a Roth IRA is a powerful tool to build long term wealth. Start early, invest consistently, and let compounding do the heavy lifting.
Resources:
- Follow @finpoweredfemale for daily personal finance, investing, and money mindset tips
- Download my Free Guide: Top 20 Fun Reads to Raise Financially Confident Kids
