Roth individual retirement accounts (Roth IRAs) are one of the most useful tax-advantaged investment tools available to most Americans. While most people start investing sometime after their first full-time jobs, the younger generations are eager to get in on the game. But can children and teenagers open their own Roth IRAs? Yes, but they may need the help of a parent or guardian.

No Age Limits

One of the best parts of a Roth IRA, other than the ability to shield you from higher tax rates later in life, is that there are no age limits to open an account. As long as the account holder has earned income for the year, they can contribute to a Roth IRA.

While they may be able to earn income, they can’t sign up for a Roth IRA on their own until age 18. Before then, you can open what is known as a custodial Roth IRA.

A custodial Roth IRA allows minors to contribute up to the maximum contribution limit for the year or 100% of their earnings, whichever is less. For 2022 tax year, they could contribute up to $6,000, increasing to $6,500 for 2023.

To open a custodial Roth IRA, you may have to search a bit. Not all banks or brokerage firms offer custodial accounts. Once you choose a platform for your child’s account, you will need their Social Security number to sign up. After that, you’ll just need to track their wages to determine how much they can contribute each year.

What Is Earned Income?

While many teenagers hold part-time jobs during the summer or after school, this isn’t the only income that counts. Wages, salaries, bonuses, and self-employment income are all considered earned income.

For many children, self-employment income can be their entrance into the world of Roth IRAs. For example, if James has a budding TikTok following or YouTube channel, they could use that income for a Roth IRA, as long as they are earning less than the yearly income restriction ($144,000 for 2022 and $153,000 for 2023).

On a smaller scale, babysitting, mowing lawns, or other entrepreneurial endeavors would count as earned income. If your family has a business, you may employ your child and pay them a fair market wage, which can then be invested.

What doesn’t count, unfortunately, is allowance or money for chores. Ideally, the Internal Revenue Service (IRS) wants all earned income to be trackable, either by a 1099 or W-2 or with receipts of work provided, such as in the case of babysitting.

Benefits of a Roth IRA for Minors

If your child falls within the earned income category, then they stand to benefit from a Roth IRA. Since children typically fall within a very low tax bracket, they would invest their after-tax dollars at a low rate in their Roth IRA. Given this fact, they are almost inevitably going to be in a higher tax bracket when they choose to withdraw money, whether they use the funds for a down payment on a house or wait until retirement age.

The ability to withdraw contributions at any time is also a benefit. This flexibility means that they can use contributed funds from childhood to fund their education or dreams of homeownership.

The Bottom Line

The beauty of a Roth IRA is its flexibility, starting with the lack of an age threshold. If your child is a budding entrepreneur, child actor, or just a hardworking teen, they can reap the benefits of this tax-advantaged plan. More than any other user, children stand to benefit from contributions at the lowest possible tax bracket. Plus, introducing them early to the practice of saving and learning about investments can create lifelong habits that will serve them well.