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The Basics Q&A: A Retirement Account for Teens? Really?

Q: My teenage daughter worked as a waitress this summer. Is it too early for her to start investing for retirement?

A: Not at all. In fact, this is a great time to start. The earlier she begins to save and invest, the more money she’ll likely have when she needs it for college—and seeing her savings add up should encourage her to keep setting money aside.

One thing she'll learn by starting now is the power of compound interest. For example, if she deposits $2,000 a year in a retirement account for just four years—and saves nothing more—in 50 years that $8,000 could become $170,832, assuming a consistent annualized 6% return.

Answered by:

Debra Greenberg Director, Personal Retirement Strategy and Solutions at Bank of America Merrill Lynch

As for where your daughter should stash her money, her best bet right now is probably a Roth IRA. Because summer jobs don't tend to produce big paychecks, teens' tax rates are usually low. For that reason, a tax-deferred traditional IRA typically wouldn't offer significant advantages. One thing to keep in mind: If your daughter's a minor (younger than 18 or 21, depending on where you live), you'll need to set up a custodial account for her until she reaches maturity.

Working teens can contribute as much as $5,500 a year of earned income to a Roth IRA.

Working teens can contribute as much as $5,500 a year of earned income to a Roth IRA. That means your daughter can continue to put a little away throughout the year if she works on weekends or during the holidays. And when she's ready for college, her Roth IRA can help her pay for tuition and other qualified higher education expenses.

While your daughter can withdraw regular contributions tax-free at any time, she'll pay ordinary federal (and possibly state and/or local) income tax on the earnings portion of the withdrawals. Those withdrawals, however, will not be subject to the 10% additional tax that otherwise could apply to earnings taken from a Roth IRA, up to the amount of her qualified higher education expenses for that year.

As she grows older, if your daughter keeps contributing to the account the earnings portion of the withdrawals won’t be subject to federal income tax or the 10% additional tax—as long as she has reached age 59½ and more than five years have passed since her first Roth IRA contribution. State and/or local taxes may apply.

You can find lots of helpful information for teaching your daughter about money management in the "Family & Money" section at

3 Questions to Ask Your Advisor

  1. How do I set up a custodial account for my daughter?
  2. Should I suggest that my daughter put a specific percentage of her earnings aside?
  3. What resources can I provide my daughter with to help her think about her financial future?

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Withdrawals of earnings are subject to ordinary income tax, unless you qualify for tax-free withdrawals. In addition, a federal 10% additional tax may apply to withdrawals of earnings taken prior to age 59 1/2, subject to certain exceptions such as expenses for qualified higher education expenses. 

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.


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