Can Teenagers Invest in Roth IRAs?

If they have some income, they can—for 50 years of compound interest

Part Of
Roth IRAs: The Complete Guide
Explore The Guide

Retirement is probably not on most teens' radars, but it should be. That’s because a relatively small investment today can grow into a much larger sum later, after decades of compounding. A great place to start is with a Roth IRA. Here are a few tips to get your teenager started on planning and saving for their future.

Key Takeaways

  • Although most teens don't think about retirement, it's important to get them started early.
  • Setting up a Roth IRA for teenagers can provide them with a comfortable financial future.
  • Anyone with earned income can contribute to a Roth IRA.
  • You can only contribute earned income to a Roth IRA.

Tax-Free Growth and Income for Retirement

One of the biggest perks of a Roth IRA is the tax break it offers. With a Roth IRA, you don’t get an upfront tax break as you do with a traditional IRA. Instead, your contributions and earnings grow tax-free forever.

This usually works out well for teens. That’s because most teens pay little if any income tax. If a teen has a summer job or works during the school year, their pay makes them eligible for a Roth. Here's how it works:

  • Any Roth IRA contributions made now aren’t deductible, but the deduction usually wouldn’t be that valuable anyway, due to high standard deduction amounts. When they get older, they'll enter a higher tax bracket, and they won't have to pay any taxes on that money.
  • Contributions can be withdrawn at any time, for any reason, without owing any taxes or penalties. But the account holder will need to hold the account for a minimum of five years and wait until they are at least age 59½ to take out the money the contributions earn in interest if they want to avoid a 10% early withdrawal penalty.

You Can Only Contribute Earned Income

Anyone can contribute to a Roth IRA, regardless of age. That includes babies, teenagers, and great-grandparents. Contributors just need to have earned income for the year they make the contribution.

Individuals earn income when they work for someone else who pays them, or when they own a business or farm. While babies are unlikely to have earned income unless they are child models or actors, the type of work teenagers often do—babysitting, lifeguarding, burger-flipping, and so forth—will qualify. Investment income does not qualify.

The contribution limits on IRAs change periodically based on inflation. For 2021 and 2022, workers can contribute up to $6,000 a year to a Roth IRA ($7,000 for those 50 or older). But the contribution can only be as large as the individual's earned income, which means if a teen earned $4,000 during the year, that is the most they can contribute.

The pay received must be legitimate and at the going market rate. For instance, parents cannot pay their kids $1,000 an hour to mow the lawn and call it earned income. Ideally, the contributor will receive a W-2 to substantiate their earnings. Otherwise, it’s a good idea to keep excellent records from odd jobs that do not provide a W-2.

Adults Can Contribute to a Teen’s Roth IRA

The Internal Revenue Service (IRS) does not care who makes the contribution. The teen just needs enough earned income to equal (or exceed) the contribution.

This means that parents and other adults can match a teen’s earnings and make a contribution themselves. For example, if a teen earns $3,000 at a summer job, their parents can kick in the $3,000 contribution and let their son or daughter spend (or save) their money. Or they could help by contributing a percentage of their teen's earnings—say, 50%.

Parents can contribute the money to a teen's Roth IRA as long as the teen earned at least that much.

How to Open a Roth IRA for a Teen

An adult has to open a custodial Roth IRA account for a minor. That’s age 18 in most states and age 19 or 21 in others. These accounts are basically the same as standard Roth IRAs, but minimum investment amounts may be lower. Many, but not all, brokers offer custodial Roth IRA accounts. Firms that currently offer accounts for minors include Charles Schwab, E*Trade, Fidelity, Merrill Edge, TD Ameritrade, and Vanguard.

As the custodian, the adult controls the assets in the Roth IRA until the minor reaches the age of majority. At that point, the account belongs to the minor. A minor can continue to invest in a Roth IRA and set themselves up for a sound financial future—as far off as that future might seem.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Internal Revenue Service. "Traditional and Roth IRAs." Accessed Dec. 20, 2021.

  2. Internal Revenue Service. "Topic No. 558 Additional Tax on Early Distributions from Retirement Plans Other than IRAs." Accessed Dec. 20, 2021.

  3. Internal Revenue Service. "IRA FAQs." Accessed Dec. 20, 2021.

  4. Internal Revenue Service. "Earned Income and Earned Income Tax Credit (EITC) Tables." Accessed Dec. 20, 2021.

  5. Fidelity. "Turbocharge Your Child's Retirement with a Roth IRA for Kids." Accessed Dec. 20, 2021.