The Custodial Roth IRA

The Custodial Roth IRA is arguably the most powerful wealth-building tool available to young people. Because you have decades of time for your money to grow, even small amounts invested now can turn into a massive fortune by the time you retire. The best part is that the government cannot tax a single cent of the profit you make.

What is a Custodial Roth IRA?

A Roth IRA is a retirement account. While most people don't think about retirement in their teens, starting now gives you a "head start" that is almost impossible to catch up on later in life.

  • Tax-Free Growth: You pay taxes on the money before it goes into the account. After that, every dollar of profit you make is 100% tax-free.

  • Flexibility with Contributions: While it is a retirement account, you can actually withdraw the money you personally put in (your contributions) at any time for any reason without paying a penalty.

Essential Facts for You and Your Parents

To be fully informed, you and your parents must understand these four specific rules:

1. The "Earned Income" Rule

This is the most important rule. To put money into a Roth IRA, the minor must have "earned income" for the year.

  • This includes money from a W-2 job (like working at a grocery store) or "self-employment" income (like babysitting, lawn mowing, or tutoring).

  • You cannot contribute more than you earned. For example, if you made $2,000 this summer, the most you can put into your Roth IRA is $2,000.

2. Contribution Limits

The government sets a maximum limit on how much can be put into a Roth IRA each year. For 2026, the limit is $7,500 or your total earned income for the year, whichever is less.

3. The "Parent Match" Strategy

A great way to use this account is for parents to "match" what a teen earns. If you earn $3,000 at a job and want to spend that money on a car or clothes, your parent can legally put $3,000 of their money into your Custodial Roth IRA for you. As long as you earned at least that much, the source of the actual cash does not matter to the IRS.

4. Impact on Financial Aid and Taxes

  • Financial Aid: Assets in a Roth IRA are usually not counted on the FAFSA. This means having a large Roth IRA typically does not hurt your chances of getting college financial aid.

  • Taxes: Because you already paid taxes on the money before it went in, you don't get a tax break today, but you get a massive tax break later when you take the money out.

How to Move Forward with Your Parents

Since a parent must open the account for you as the "Custodian," you need to discuss the logistics of your income.

Things to talk about together:

  • Record Keeping: If you are self-employed (like mowing lawns), you and your parents need to keep a simple log of who paid you, when, and how much. This is vital in case the IRS has questions.

  • The "Wait" Rule: Remind each other that while you can take out the money you put in, the profits should stay in the account until you are at least 59½ to stay tax-free.

  • Investment Choices: Since this is a long-term account, talk about choosing "Growth" investments like S&P 500 index funds that track the biggest companies in the country.