Roth IRAs for Teens: A Smart Start with Powerful Potential

July 22, 2025

Saving for retirement isn’t usually top of mind for teenagers, but starting early with the right tools can make a world of difference down the road. One of the most effective ways for teens to build long-term wealth is through a Roth IRA.

With tax-free growth and tax-free withdrawals in retirement, a Roth IRA offers teens a unique opportunity to get ahead financially; however, there are a few key rules and limitations that are important to note.

Here’s what teens and their parents need to know:

Who Can Open a Roth IRA?

To contribute to a Roth IRA, a teenager must have earned income. This includes:

Wages from a part-time job (reported on a W-2)
Self-employment income (such as babysitting, mowing lawns, or freelance work)
Any form of income that would be reported on a tax return

Unearned income — such as allowances, gifts, or investment gains — does not qualify.

How Much Can a Teen Contribute?

The annual Roth IRA contribution limit in 2025 is $7,000. However, teens can only contribute up to the amount they earned that year.

For example, if a teenager earns a total of $3,000 in 2025, their maximum Roth IRA contribution for the year is $3,000.

What About Taxes?

Roth IRA contributions are made with after-tax income, meaning the teen pays income taxes on their earnings now. But in return, they get the benefit of tax-free growth and tax-free withdrawals in retirement.

Since teens are typically in a low tax bracket, the Roth IRA presents a powerful opportunity to make low-tax contributions today and enjoy tax-free income later.

What Is a Custodial Roth IRA?

Because minors can’t legally open accounts on their own, Roth IRAs for teens must be set up as custodial accounts. Here’s how it works:

A parent or guardian opens and manages the account on behalf of the teen
The assets legally belong to the teen
The teen gains full control once they reach the “age of majority” (typically 18 or 21, depending on the state)

Parents can also gift the contribution and fund it on behalf of their teen, as long as the contribution does not exceed the teen’s earned income for the year. These gifts are subject to gift tax rules, but there are annual exclusions that allow for tax-free gifting.

What Are The Withdrawal Rules and Restrictions?

While Roth IRAs are flexible, they are designed for retirement and should be approached thoughtfully. Here are the rules:

Contributions (the money put in) can be withdrawn at anytime, tax- and penalty-free.
Earnings (growth on investments) are subject to taxes and a 10% penalty if withdrawn before age 59½, unless an exception applies, such as a first-time home purchase or paying for qualified education expenses.
To withdraw earnings tax-free, the account must be open for at least 5 years, and the account holder must be at least 59½.

Why Should You Consider Opening a Roth IRA for Your Teen?

Starting a Roth IRA as a teenager can offer powerful long-term benefits:

Compound growth over decades
Tax-free retirement income
Financial education and good saving habits early in life

Even a modest contribution in a teen’s Roth IRA today can potentially grow into tens or hundreds of thousands of dollars by retirement age.

Final Thoughts

A Roth IRA is one of the few retirement savings vehicles available to teens, and it can provide many unique and long-term advantages. With tax-free growth, tax-free withdrawals in retirement, and the power of compounding over decades, Roth IRAs can be a valuable tool that help set the foundation for your child’s long-term wealth.

While there are important guidelines, like the need for earned income, contribution limits, and withdrawal restrictions, they are often manageable with a bit of planning and parental guidance.

For families looking to instill strong financial habits and give their teen a head start on the future, opening a Roth IRA can be a simple step with a lasting impact.

For more helpful content delivered directly to your inbox, sign up for our newsletter.

Important Disclosure Information

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC [“Welch”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.welchgroup.com. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Important Video Disclosure Information

The video segment by The Welch Group, LLC (“Welch) was intended for general information purposes only. No portion of the video serves as the receipt of, or as a substitute for, personalized investment advice from Welch or any other investment professional of your choosing. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy, or any non-investment related or planning services, discussion or content, will be profitable, be suitable for your portfolio or individual situation, or prove successful. Neither Welch’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if Welch is engaged, or continues to be engaged, to provide investment advisory services. Welch is neither a law firm nor accounting firm, and no portion of its services should be construed as legal or accounting advice. No portion of the video content should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Welch is engaged, or continues to be engaged, to provide investment advisory services. Copies of Welch’s current written disclosure Brochure and Form CRS discussing our advisory services and fees are available upon request or at www.welchgroup.com.

"*" indicates required fields

Phone

This field is for validation purposes and should be left unchanged.

Name*

First Last

Email*