Your Teen's First Job: Earned Income and the Custodial Roth IRA

The summer your kid lands a first paying job is also the moment one of the most powerful long-term accounts becomes possible: a custodial Roth IRA. The key that unlocks the door is a specific thing called earned income — money from actual work.

Until a kid has earned income, a Roth simply isn't available to them. The year they first earn money is the year it opens. Here is how it works.

What counts as earned income

This is the part that trips people up, so it is worth being precise. Only money earned from work makes a child eligible to contribute to a Roth.

How much can go in

A child can contribute up to the amount they earned during the year, capped at the annual IRA limit (which is $7,500 for 2026). So:

• Earns $1,500 in a year → can contribute up to $1,500.
• Earns $20,000 in a year → capped at the $7,500 limit.
• Earns nothing in a year → no contribution that year.

The part parents love: you can fund it for them

The dollars that go into the Roth don't have to be the child's own. A parent or grandparent can gift the contribution, as long as the total going in doesn't exceed what the child actually earned. In practice, that means a teen can keep — or spend — their paycheck while you fund the Roth on their behalf, up to the amount they earned. It is one of the cleanest ways to turn a summer job into a real head start.

Why a Roth is so powerful for a kid

Roth contributions go in with money that has already been taxed — and kids usually owe little or no income tax, so that "tax cost" is often near zero. From there, the money grows completely tax-free for decades. Because a kid has so many years ahead of them, starting in the teens instead of the twenties can mean a dramatically larger result by retirement. That is compounding doing the heavy lifting over the longest runway a person will ever have.

One more nuance: earned income is not subject to the kiddie tax the way investment income can be — another reason a working teen's Roth is so tidy.

Keeping records

Documentation is simple but worth doing. For a regular job, hold onto pay stubs. For self-employment like babysitting, mowing, or tutoring, keep a basic log of dates, amounts, and who paid — that is what backs up the earned income, and self-employment income needs to be reported.

It's a custodial Roth — so you stay in control

Like other custodial accounts, a parent or guardian manages the Roth until the child reaches the age of majority, and then it becomes fully theirs. And because Roth contributions (the money you put in, not the growth) can generally be withdrawn without taxes or penalty, there is built-in flexibility if life comes up.

This explains how the rules work — it isn't financial or tax advice. Whether a Roth fits your family, and exactly how much to contribute, depends on your specifics; a CPA or fee-only planner is the right person to weigh that with you.

What to do this week

1. When your teen earns money from work, note the amount — that is the contribution ceiling.
2. Open (or contribute to) a custodial Roth IRA at your brokerage in your teen's name.
3. Save the pay stubs, or start a simple earnings log for self-employment.
4. Connect the account in MemoryBank so your teen can watch their first real retirement money grow.