Roth IRA for Teens: The Most Powerful Wealth-Building Tool
Lock in tax-free growth when you're in the 0% bracket
Why Roth IRA Is the #1 Account for Teens
If you could pick ONE financial move for a teenager with earned income, it's this:
Open a Custodial Roth IRA.
Here's why it's so powerful for teens:
| Advantage | Why It Matters for Teens |
|---|---|
| Tax-free growth forever | Money grows and is withdrawn tax-free in retirement |
| Low/zero tax bracket now | Paying 0% tax on contributions beats paying 22%+ later |
| Time for compounding | 50+ years of growth ahead |
| Contributions withdrawable | The money you put in can be taken out anytime, penalty-free |
| Not counted for financial aid | Retirement accounts are excluded from FAFSA |
The Math: Why Starting at 15 Is Life-Changing
Example: $3,000/year from age 15-25, then stop
| Age | Total Contributed | Value at 65 (7% return) |
|---|---|---|
| 15 | $0 | — |
| 25 | $30,000 | — |
| 65 | $30,000 | $604,000 |
That's right: $30,000 in contributions becomes $604,000 — all tax-free.
Compare: Starting at 25 and contributing until 65
| Age | Total Contributed | Value at 65 (7% return) |
|---|---|---|
| 25 | $0 | — |
| 65 | $120,000 | $599,000 |
Contributing 4x as much results in LESS money because you started 10 years later.
This is the power of compound interest + time + tax-free growth.
How Custodial Roth IRA Works
The Basics
| Feature | Details |
|---|---|
| Who controls it | Parent/guardian (custodian) until age of majority |
| Who owns it | The minor (beneficiary) |
| Contribution limit | Lesser of $7,000 (2024) or total earned income |
| Tax treatment | Contributions: after-tax. Growth: tax-free. Qualified withdrawals: tax-free. |
| Required | Child must have earned income |
The "Earned Income" Rule
Critical: The child must have earned income to contribute.
| Counts as Earned Income | Does NOT Count |
|---|---|
| W-2 wages | Allowance |
| Self-employment income | Investment income |
| NIL income | Gifts |
| Babysitting income | Interest |
| Lawn care/odd jobs | Inheritance |
The contribution limit is the LESSER of $7,000 OR total earned income.
If your teen earned $2,000, they can only contribute $2,000. If they earned $10,000, the limit is $7,000.
Who Can Contribute?
Anyone can fund the Roth IRA:
- The teen themselves
- Parents
- Grandparents
- Anyone else
The teen doesn't have to contribute their own money — they just need to have earned income.
Common strategy: Teen earns $3,000 at a summer job, spends it on normal teen stuff. Grandparent gifts $3,000 to fund Roth IRA. Everyone wins.
Opening a Custodial Roth IRA
Where to Open
| Brokerage | Minimum | Notes |
|---|---|---|
| Fidelity | $0 | Most popular for custodial Roth |
| Schwab | $0 | Robust platform |
| Vanguard | $0 | Pioneer of low-cost investing |
What You'll Need
- Parent/guardian information (SSN, address)
- Minor's information (SSN, birthdate)
- Bank account for funding
- 10-15 minutes to complete application
What to Invest In
For a teenager with 50+ years until retirement, simple is best:
| Investment | Why It Works |
|---|---|
| Total Stock Market Index Fund | Diversified, low-cost, long-term growth |
| Target-Date Fund | Automatically adjusts as you age |
| S&P 500 Index Fund | 500 largest US companies |
ISP recommendation: A total stock market index fund (like VTI or FSKAX) is hard to beat for decades-long investing.
Tax Benefits Explained
The 0% Bracket Advantage
Most teens are in the 0% federal income tax bracket (income below standard deduction).
| Traditional IRA | Roth IRA |
|---|---|
| Contribute pre-tax | Contribute after-tax |
| Pay taxes on withdrawal | Withdraw tax-free |
| Best if tax rate higher now | Best if tax rate lower now |
For a teen in the 0% bracket, paying "tax" on contributions costs nothing. But avoiding tax on $600,000+ in growth is worth tens of thousands.
This is the perfect time for Roth contributions.
Tax-Free Growth Forever
Once money is in a Roth IRA:
- Dividends? Tax-free.
- Capital gains? Tax-free.
- Qualified withdrawals in retirement? Tax-free.
The IRS will never touch this money again (assuming rules don't change).
Withdrawal Rules
Contributions: Anytime, No Penalty
The money you PUT IN (not the growth) can be withdrawn anytime, for any reason, tax and penalty-free.
| Contributed | Growth | Total Balance |
|---|---|---|
| $10,000 | $5,000 | $15,000 |
| Can withdraw tax/penalty-free: $10,000 | — | — |
This makes Roth IRA a flexible emergency fund AND retirement account.
Earnings: After 59½ (Usually)
Growth can be withdrawn tax and penalty-free after:
- Age 59½ AND
- Account has been open 5+ years
Before that, withdrawing earnings incurs:
- Income tax on the amount
- 10% early withdrawal penalty
Exceptions: First-time home purchase ($10,000 lifetime), qualified education, disability, death.
Roth IRA vs. Other Accounts
| Account | Tax Treatment | Withdrawal Flexibility | Financial Aid | Best For |
|---|---|---|---|---|
| Roth IRA | Tax-free growth | Contributions anytime | Not counted | Long-term wealth |
| Traditional IRA | Tax-deferred | Penalties before 59½ | Not counted | Higher tax bracket now |
| 529 Plan | Tax-free for education | Education only | 5.6% weight | College savings |
| UGMA/UTMA | Kiddie tax applies | Anytime | 20% weight | Flexibility |
For teens with earned income: Roth IRA wins for long-term wealth. Period.
What ISP Teaches
The Roth IRA Challenge
One of the most important challenges in the Financial Skill Tree:
- Learn — Understand how Roth IRA works and why it's powerful
- Earn — Have earned income (job, NIL, self-employment)
- Open — Open a Custodial Roth IRA with a parent
- Fund — Make a first contribution (even $100)
- Invest — Select an index fund
- Teach — Create a "You Teach" video on compound interest or Roth IRA basics
Completing the Challenge Earns:
- 🏦 Future Millionaire Badge on your MyPath profile
- Major OVR boost in the Financial Skill Tree
Why "Future Millionaire"?
A 15-year-old who maxes out a Roth IRA for 10 years and then stops is virtually guaranteed to be a millionaire by 65 (assuming historical market returns).
The math:
- $7,000/year × 10 years = $70,000 contributed
- Compounding at 7% for 50 years = $1.4+ million
That's why we call it the Future Millionaire badge.
Common Roth IRA Mistakes
| Mistake | Why It's a Problem | What to Do Instead |
|---|---|---|
| Waiting until "later" | Loses years of compounding | Start with any amount now |
| No earned income | Can't contribute legally | Get a job, NIL, or self-employment income |
| Investing too conservatively | 50 years of growth needs growth assets | Mostly stocks for long horizons |
| Treating it like a savings account | Cash drag kills returns | Invest the money, don't just deposit |
| Not documenting earned income | IRS could challenge | Keep pay stubs, 1099s, records |
| Contributing more than earned income | Excess contribution penalty (6%/year) | Only contribute up to what you earned |
FAQ
Q: Can my parents contribute for me if I earned the money?
A: Yes. Anyone can fund your Roth IRA. You just need to have earned at least as much as the contribution.
Q: What if I need the money before retirement?
A: You can always withdraw your contributions tax and penalty-free. Growth is locked until 59½ (with some exceptions).
Q: Does babysitting or lawn care count as earned income?
A: Yes — it's self-employment income. Keep records of what you earned (log of jobs and payments).
Q: What happens when I turn 18?
A: The custodial account converts to a regular Roth IRA in your name. You gain full control.
Q: Can I have a Roth IRA and a 529?
A: Yes — they serve different purposes. 529 for education, Roth for long-term wealth.
Q: What if I'm not sure I'll need the money for retirement?
A: Roth IRA contributions can be withdrawn anytime. It's the most flexible retirement account.
Related Topics
- Your First Job → — Getting earned income
- Investing for Minors → — Other investment account options
- Filing Your First Tax Return → — Documenting earned income
- Saving for College → — Roth vs. 529 for education
- The Priority Stack → — Where Roth fits in the plan
- Personal Finance Overview →