The custodial Roth IRA: the best financial gift you can give a working teenager
A teenager who earns $4,000 at a summer job can, with one parental action, convert that summer's earnings into over $110,000 in tax-free retirement wealth — without contributing another dollar after age 16. This isn't a hypothetical. It's the math of a custodial Roth IRA, and most families leave it completely untouched.
How a custodial Roth IRA works
A standard Roth IRA requires the account holder to be an adult. A custodial Roth IRA solves this: the parent opens and manages the account on behalf of the minor child. The child is the owner; the parent is the custodian. When the child turns 18, they take full control of the account — which, by then, has been compounding for years.
The rules are identical to an adult Roth IRA, with one additional requirement:
- The child must have earned income in the year of contribution
- The contribution limit is the lesser of $7,500 or their total earned income for the year
- The parent (or grandparent, or the child themselves) can make the actual contribution — the money doesn't have to come from the child's paycheck
- Contributions are made with after-tax money; growth and qualified withdrawals are tax-free
The parent can "gift" the contribution amount to the child and then contribute it to the Roth IRA, even if the child already spent their actual earnings. The IRS cares that earned income existed — not which specific dollars were deposited.
What counts as earned income?
This is where families often stall. The IRS defines earned income as wages, salaries, tips, and self-employment net earnings. For teenagers, this includes:
- W-2 jobs (part-time, summer employment, retail, food service)
- Babysitting and child care income
- Lawn mowing, snow shoveling, and other neighborhood services
- Self-employment income from freelance work (graphic design, tutoring, social media)
- Acting, modeling, or performance income with appropriate documentation
What does not count: interest and dividends, gifts from relatives, income from investments, Social Security benefits, or allowance (unless it's structured as compensation for legitimate self-employment services to a family business).
For cash-based income like babysitting, maintain records — dates, families, amounts paid. The IRS doesn't require Form 1099 for self-employment income under $600 from any single payer, but the income is still taxable and reportable, and must be documented to support a Roth IRA contribution.
The math: $4,000 from one summer, 49 years later
A 16-year-old earns $4,000 at their first summer job. Parent opens a custodial Roth IRA and contributes $4,000 (the child keeps their actual earnings for spending and saving). The $4,000 is invested in a total market index fund.
At 7% average annual return for 49 years (from age 16 to age 65):
FV = $4,000 × (1.07)^49 = $4,000 × 27.530 = $110,120 — tax-free
Math detail: (1.07)^32 = 8.715; (1.07)^16 = 2.952; (1.07)^48 = 8.715 × 2.952 = 25.729; (1.07)^49 = 25.729 × 1.07 = 27.530.
One summer. $4,000. Over $110,000 at retirement, untouched by income tax. That's the power of starting 49 years early inside a tax-free account.
Four summers: what $7,500/year from ages 15 to 18 becomes
If a teenager earns enough to max the Roth IRA for four consecutive years — $7,500/year at ages 15, 16, 17, and 18 — the long-term result is remarkable:
| Contribution at Age | Amount | Years to Age 65 | Value at 65 (7%) |
|---|---|---|---|
| 15 | $7,500 | 50 | $220,928 |
| 16 | $7,500 | 49 | $206,475 |
| 17 | $7,500 | 48 | $192,968 |
| 18 | $7,500 | 47 | $180,345 |
| Total contributed: $30,000 | $800,716 tax-free |
Calculation: (1.07)^50 = 29.457; (1.07)^49 = 27.530; (1.07)^48 = 25.729; (1.07)^47 = 24.046. Each × $7,500.
Four summers. $30,000 invested. Over $800,000 in tax-free retirement wealth, contributed entirely before age 19. This assumes the child never contributes another dollar to the account after 18 — and still the outcome is staggering.
Which brokerages offer custodial Roth IRAs?
| Brokerage | Account Name | Minimum to Open | Process |
|---|---|---|---|
| Fidelity | Fidelity Roth IRA for Minors | $0 | Online application, ~20 minutes |
| Charles Schwab | Custodial IRA | $0 | Online or in-person at a branch |
| Vanguard | Custodial Roth IRA | $0 | Online; some accounts may require a call |
Fidelity is the most commonly recommended option for ease of setup. Their "Roth IRA for Minors" product is clearly named and the online application walks through both the custodian and the minor's information step-by-step. Once funded, invest in FZROX (0.00% expense ratio) or any total market index fund.
How to open one at Fidelity
- Go to fidelity.com → Open an Account → Roth IRA → "For a Minor"
- Enter your information as custodian (parent's name, SSN, address)
- Enter the child's information (name, SSN, date of birth)
- Link a bank account and fund with the contribution amount (up to the lesser of $7,500 or the child's earned income for the year)
- Buy FZROX or a total market index fund — in dollar amounts, no need to buy whole shares
When the child turns 18, Fidelity will contact them to convert the account to a standard Roth IRA in their own name. The investment account and its history transfer completely — nothing is liquidated or restarted.
The "gift" strategy: keeping the child's earnings
Many teenagers are reluctant to invest money they just earned — they want to spend it. There's a parent-friendly workaround: you contribute to their Roth IRA using your money (as a gift to them), and they keep their actual earnings. The IRS only requires that the child had earned income at least equal to the contribution amount during that tax year. The source of the actual dollars deposited into the Roth doesn't matter.
This means: if your 16-year-old earns $4,000 this summer, you can contribute $4,000 of your own money to their custodial Roth IRA, and they can spend their paycheck. You've effectively given them $4,000 of retirement wealth rather than $4,000 of spending money. The IRS gift tax annual exclusion ($18,000 per recipient in 2026) covers this comfortably.
For a deeper look at the underlying tax strategy, see Roth vs. Traditional IRA and Tax Planning for FIRE.