Learn why opening a Roth IRA for your teen as soon as they have earned income is a smart way to build long-term, tax-free wealth.
By Mike Dunlop, CFP®| Flat-Fee Fiduciary Financial Planner | Ignite Financial, Iowa
Parents often ask, “When should I help my child open a Roth IRA?” The short answer: as soon as they earn income. The longer answer? There’s a lot of strategy and opportunity behind that decision—and understanding the details can lead to a powerful head start on your teen’s financial future.
Whether your child is lifeguarding, detasseling corn, babysitting, or helping with the family business, opening a Roth IRA for your teen is one of the smartest long-term financial moves a parent can support. At Ignite Planning, we work with Iowa families who want to build generational wealth—and it often starts with simple, intentional choices like this.
A Roth IRA is an individual retirement account that allows after-tax dollars to grow tax-free. That means your child won’t get a tax deduction today, but when they withdraw funds in retirement, they won’t pay taxes on the contributions or the investment growth—if they meet certain requirements.
The key rules:
Let’s look at a hypothetical example. If a 16-year-old contributes $2,000 a year for five years (until age 20), and never contributes again, and the account earns an average annual return of 8%, that account could grow to over $230,000 by age 65.
Important Disclosure: This is a hypothetical illustration and does not represent actual investment results. Returns are not guaranteed and investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.
The takeaway? Time is the most powerful factor in long-term investing, and teens have more of it than anyone.
To be eligible for a Roth IRA contribution, the teen must have earned income. That includes:
Note: Gifts, allowance, and investment earnings do not count as earned income.
For minors (typically under age 18), a parent or guardian will need to open a custodial Roth IRA. The adult controls the account until the child reaches the age of majority—usually 18 or 21, depending on your state. After that, the child assumes full control.
Several custodians offer Roth IRAs for minors, including:
Opening the account usually involves completing a short application and linking a funding source.
Although the teen must earn the income, anyone can fund the Roth IRA—parents, grandparents, or even the teen themselves. This is a great way to encourage saving while celebrating milestones like birthdays, holidays, or graduation.
Just ensure that the total contribution doesn’t exceed the teen’s actual earnings for the year.
Opening the account is just the first step. The money must then be invested to achieve growth over time. At Ignite Planning, we recommend keeping it simple and diversified.
Here are some commonly used low-cost index fund examples:
Disclosure: The ETFs mentioned above are for illustrative purposes only and are not recommendations. Consider your financial goals, time horizon, and risk tolerance before investing. Consult your advisor to determine what’s right for your situation.
For most teenagers, a 100% stock allocation makes sense given the long time horizon.
Opening a Roth IRA is more than a financial step—it’s a teaching opportunity. You can use this experience to explain:
These early lessons build habits of discipline, ownership, and future-mindedness—essential tools for adulthood.
For families seeking to instill financial wisdom and life purpose in their teens, Mike Finley's book, Now What?: The Day You Receive a Diploma is Not the End. It is the Beginning! offers valuable insights.
Finley, a fellow Iowan and advocate for financial literacy, emphasizes the importance of intentional decision-making and personal growth. His book serves as a guide for young adults navigating life's transitions, making it a perfect companion to the financial lessons learned through establishing a Roth IRA.
“Isn’t this too early to worry about retirement?”
Not really. A Roth IRA is more than just a retirement account—it’s a versatile tool. Contributions can be withdrawn anytime without tax or penalty, and it can be used for a first-time home purchase or qualified education expenses.
“What happens when my child turns 18?”
The account becomes theirs to manage. At that point, we recommend setting up a review meeting or financial coaching session to help them understand how to continue growing it wisely.
“Can they use it for college?”
Yes. Roth IRA funds can be used for qualified higher education expenses, and contributions can always be withdrawn tax- and penalty-free. But keep in mind, assets in a Roth IRA may impact financial aid eligibility.
At Ignite Planning, we specialize in flat-fee, fiduciary financial planning for Iowa families. Our goal is to simplify smart decisions like this and build financial literacy across generations.
We’ve seen firsthand the difference it makes when young people start learning early—not just about investing, but about patience, consistency, and wise stewardship of money.
If you’re ready to open a Roth IRA for your teen:
Helping your teen open a Roth IRA might seem small today—but it can create a massive impact over the long run. More importantly, it sends a message: “I believe in your future, and I’m going to help you build a strong foundation.”
If you’d like help opening a custodial Roth IRA, building a simple investment strategy, or aligning your family’s values with your financial goals, schedule a call. We’re a fee-only financial planner based in Cedar Falls, Iowa, serving clients locally and nationwide.
Let’s plant seeds today that will grow into confidence tomorrow.