One of the most valuable financial lessons we can teach our kids is the importance of saving for their future. That’s easier said than done, especially when we think of teenagers.
In a way though, the value of saving is more caught than just taught. If you want your kids or grandkids to “catch” the vision of saving money, give them the opportunity to see the power of saving–and investing–here and now.
Today, we’re looking at a tool we recommend giving the next generation a financial head start and a strong dose of wise stewardship: custodial Roth IRA’s.
What Is a Custodial Roth IRA?
A custodial Roth IRA is an investment account that allows minors to begin saving for retirement as soon as they have earned income. Unlike traditional savings accounts, the money in a Roth IRA grows tax-free, and withdrawals in retirement are also tax-free. This means two things:
- You’re not giving free access to cash, likely to burn a hole in their pocket.
- Even relatively small contributions made in a teen’s early working years can snowball into a significant sum thanks to decades of compounding growth.
The Power of Starting Early
Imagine a 16-year-old contributing just $1,000 one time into a custodial Roth IRA. Over 50 years, with an average annual return of 7%, that contribution alone could grow to nearly $30,000 with no additional investments. Now, picture a series of contributions year after year—suddenly, the long-term impact is massive!
Courtesy of this Schwab Savings Calculator
Parents can also provide additional motivation by offering a match.
Just like employers match 401(k) contributions, parents can encourage savings by matching a portion of what their child contributes. For example, if a teen earns $2,000 over the summer and decides to put $500 into a Roth IRA, parents could match 50% of that amount, adding another $250. This is a powerful accelerator of savings. Healthy habits aren’t just about restraint; they’re about enjoying the rewarding outcome. Even a teenager can get excited about savings as they watch their balance grow!
Grandparents Can Get Involved Too
We often hear from grandparents who have already contributed to 529 plans for their grandkids' education but want to help in other ways. If their grandchildren have earned income, funding a custodial Roth IRA is a meaningful legacy gift that can set them up for financial success. It’s a way to pass down wealth and financial wisdom at the same time.
How You Can Get Started
Setting up a custodial Roth IRA is relatively straightforward. The key requirement is that the child must have earned income, whether from a part-time job, babysitting, or freelance work. Parents or guardians open the account on their behalf and manage it until the child reaches adulthood, at which point they take complete control.
If you’re looking for ways to help your child or grandchild build financial independence early, a custodial Roth IRA is an excellent tool. The earlier they start, the more time their money has to grow.
Want to explore if a custodial IRA is right for your family? Reach out to us—we’d love to help you get started!