When it comes to teaching children about financial responsibility, starting early can make a significant difference. One option worth considering is a Roth IRA for your child, which can set them on the path to long-term financial security.

Unlike traditional retirement accounts, Roth IRAs offer unique advantages for minors, including tax-free growth and the ability to withdraw contributions at any time without penalty. Here’s how you can use this strategy to give your child a head start on building wealth.

Getting Started: Eligibility and Contributions

Roth IRAs for minors—called custodial Roths—require the child to earn income, such as wages from a part-time job, self-employment, or payment within a family business.

If you own a business, you can employ your young children for age-appropriate tasks, potentially starting as young as 6 or 7, provided the work is legitimate and reasonably compensated.

Alternatively, if your teenage child has a traditional job, they can contribute their earnings directly to a Roth IRA. Alternatively, you can make contributions on their behalf.

You manage the account for your child until they reach the age of majority, usually age 18. At that point, they take over control of the Roth.

The Power of Early Investing

One of the most compelling benefits of starting a Roth IRA early is the potential for long-term growth through compounding.

For example, if you contribute $2,000 annually to your child’s Roth IRA for just 10 years, you would have invested $20,000. Assuming a modest average annual return, that initial investment could grow significantly over time—potentially reaching around $500,000 by the time your child is ready to retire.

This impressive growth is due to the power of compounding, where the earnings on investments are reinvested to generate even more earnings over time. For more on how compounding works, check out our article on the topic.

Rules and Restrictions

While Roth IRAs offer advantages, there are some important rules to keep in mind. Since contributions must come from earned income, gifts or allowances do not qualify. Additionally, for 2024, contributions cannot exceed the child’s earned income or $7,000, whichever is lower. Your child cannot have made more than $161,000 in 2024 to contribute to a Roth (probably not an issue for most kids!).

However, because contributions to a Roth IRA can be withdrawn at any time without taxes or penalties, the account offers flexibility that can be beneficial for future expenses, such as college costs or purchasing a first home. (However, we generally advise that people use other financial sources before touching their retirement savings.)

Is a Roth right for you and your child? You might try talking to a fiduciary financial advisor. At Hassell Wealth Management, we help clients integrate decisions like opening custodial Roth IRAs into their broader financial plan.

By incorporating these accounts into your overall wealth-building strategy, you can help set your child on the path to financial success while taking advantage of tax-efficient growth opportunities.

Schedule a complimentary 30-minute discovery call with a fiduciary wealth advisor.