Opening a Roth IRA for your teenager who earns money from a summer job is a great way to start building their retirement savings early. To do this, your teen must have earned income from their job, which makes them eligible to contribute to a Roth IRA. Since minors can’t open these accounts on their own, you’ll need to open a custodial Roth IRA to manage the account until your teen becomes an adult.
What makes a teenager eligible to open a Roth IRA?
To open a Roth IRA, your teenager must have earned income, which includes wages from jobs like summer employment, internships, or self-employment. Money received as gifts, allowances, or from investments does not count as earned income. There is no minimum age to open a Roth IRA, but because minors can’t legally open investment accounts on their own, a parent or guardian must act as custodian. This custodian manages the account until the teen reaches the age of majority, which varies by state—usually 18 or 21. Your teen’s contribution to the Roth IRA can’t exceed their total earned income for the year.
How to prove your teenager’s earned income from a summer job
You’ll need proof of your teen’s earned income to comply with IRS rules when opening and funding a Roth IRA. The best proof is pay stubs that show hours worked and wages earned. If your teen files a tax return, the income reported there also works as verification. For informal jobs without pay stubs, some financial institutions accept a signed statement from the employer detailing wages and hours, but this depends on the provider’s policies. Keep all income documentation organized, as you may need it when opening the account or making contributions.
Which financial institutions allow minors to open Roth IRAs?
Since minors can’t open Roth IRAs by themselves, you’ll need to open a custodial Roth IRA through a bank, brokerage firm, or credit union. Brokerage firms typically offer more investment choices, like mutual funds, ETFs, and stocks, which can help the account grow over time. Banks and credit unions may offer simpler options such as savings accounts or CDs. When selecting a provider, consider fees, minimum investment requirements, available investment options, and ease of account management. Some firms specialize in custodial accounts and provide educational resources designed for young investors.
Step-by-step guide to opening and funding a Roth IRA for your teenager
- Gather your teenager’s Social Security number, proof of earned income (pay stubs or tax returns), and your own ID.
- Choose a financial institution that offers custodial Roth IRAs for minors.
- Complete the application for a custodial Roth IRA, providing information for both you (the custodian) and your teenager (the beneficiary).
- Submit proof of your teen’s earned income as required by the institution.
- Contribute an amount up to your teenager’s earned income for the year, but not exceeding the IRS limit of $6,500 for 2024.
- Select investments based on your teen’s risk tolerance and time horizon; low-cost index funds or ETFs are good options for diversified growth.
- Set up online access to monitor the account and teach your teen how their investments work.
- Keep records of contributions and earnings each year for tax reporting and future reference.
What are the contribution limits and withdrawal rules for a teenager’s Roth IRA?
The contribution limit for a Roth IRA is the smaller of your teen’s earned income or the IRS annual limit, which is $6,500 for 2024. For example, if your teen earns $3,000 in their summer job, they can contribute up to $3,000 that year. Contributions are made with after-tax dollars, so your teen can withdraw those contributions at any time without taxes or penalties. However, withdrawing earnings before age 59½ and before the account has been open for five years could trigger taxes and penalties unless the withdrawal meets exceptions like buying a first home or paying for education. Since the account is custodial, you control withdrawals until your teen reaches adulthood, but it’s best to leave the money invested to benefit from compound growth.
Conclusion
Starting a Roth IRA for your teenager with earnings from a summer job sets them on a path to long-term financial security. By confirming their eligibility, choosing the right financial institution, and following the steps to open and fund the account, you help your teen save tax-free for retirement. Keeping contributions within earned income limits and understanding withdrawal rules ensures the account remains a valuable financial tool for their future.
Frequently Asked Questions
Can a teenager open a Roth IRA without a custodian?
No. Minors cannot legally open Roth IRA accounts on their own. A parent or guardian must open a custodial Roth IRA and manage it until the teenager reaches adulthood.
What counts as earned income for a teenager’s Roth IRA contributions?
Earned income includes wages, salaries, tips, and income from self-employment. Gifts, allowances, and investment income do not qualify as earned income.
Can my teenager contribute more than they earn from their summer job?
No. Roth IRA contributions can’t exceed your teenager’s total earned income for the year. Contributions are limited to the lesser of earned income or the IRS annual contribution limit.