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Because it’s never too early to start saving — a Roth IRA for teens

Give your teens a financial head start — and an easy way to learn important money lessons — by opening a custodial Roth IRA for them


AT AGE 16, IT'S HARD TO SEE PAST COLLEGE (or even the next soccer game), much less into retirement. But today’s teens can expect to live well into their 80s and beyond. “Funding a comfortable lifestyle for that length of time will take a lot of money,” says Debra Greenberg, director, Personal Retirement Product Management, Bank of America. “Parents can help their kids think ahead, though. “It’s as easy as opening a custodial Roth IRA,” she adds. “Doing so is a great way to teach your kids the power of compounding, talk to them about the basics of budgeting and investing and help them make saving a habit.”


Debra Greenberg headshot
“Opening a custodial Roth IRA is a great way to teach your kids the power of compounding, talk to them about the basics of budgeting and investing and help them make saving a habit.”

— Debra Greenberg, director, Personal Retirement Product Management, Bank of America

Here’s how it works: As long as your teen has taxable compensation (think weekend or summer job), you can generally open an account for them through any bank, brokerage or wealth management firm that offers custodial Roth IRA accounts. You’ll be named as custodian until your teen reaches “the age of majority” (the age at which a person is legally considered an adult — usually 18 to 21, but it varies by state). At that point, your teen will assume control of the account.


The paperwork should be simple, and once the account is set up, the rules governing it are the same as those that apply to any other Roth IRA. After-tax dollars are used to fund the Roth;  the maximum amount your teen can contribute annually for 2023 is $6,500, or the total amount of taxable compensation he or she earns during the year, whichever is less (assuming your teen does not exceed the adjusted gross income limit for Roth IRA contributions). Your financial advisor can walk you through the process and even give your teen some pointers on how to plan ahead for college and  manage their money when they get there, says Greenberg.


The account will offer a range of options to choose from when deciding how to allocate the funds. “It’s a great opportunity to sit down and research potential investments together,” says Greenberg. Of course, investments can also lose value and a Roth IRA can be an effective vehicle for teaching teens the basics, such as the importance of diversification, sound fundamentals and the trade-offs between risk and return.  Watch the video below with your teen to get started.

Time’s on your teen’s side: Though the amount anyone can save from a summer job may seem small, its potential impact is large. Suppose your teen puts away $2,000 in after-tax dollars the first year and makes three additional $2,000 deposits during the next three years. If the $8,000 in contributions grows at 6% annually, after 50 years —  or about the time when your teen is ready to begin thinking about retirement —  the account could be worth $170,832.  And if those $2,000 annual contributions continued for 50 years instead of just four?  Assuming 6% average annual growth, the $100,000 in contributions could grow to $615,512.1 That’s the power of compounding over time — an important lesson.


What if your teen needs the money sooner? Roth IRA contributions (though not the investment earnings) can be withdrawn at any time for any reason without being subject to tax. So your teen could use some of their contributions to help pay for college or take a gap year abroad. Certain qualified distributions2 of earnings and contributions — including a lifetime limit of up to $10,000 used to pay for a first-time home purchase — become federal income tax free five years from the beginning of the year in which the custodial Roth IRA was established (state and local taxes may vary). Nonqualified withdrawals of earnings are subject to federal income tax, possibly state and local income tax, and a 10% early-withdrawal additional tax.

Match game. Anyone, including parents and grandparents, can encourage teens to save by pledging to match any amount they save and contributing it to their custodial account, as long as the matching contribution doesn’t push them over their contribution limit for the year.


By matching their savings, you’ll teach them another important financial lesson – the power of taking advantage of matching funds from an employer when they’re all grown up and working full time on their own.

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1Source: Merrill Lynch Wealth Management and Chief Investment Office, Merrill and Bank of America Private Bank, April 2023.


2A qualified distribution is one that is taken at least five tax years after the first day of the year of the first Roth IRA contribution. In addition, the Roth IRA owner must be age 59½ or older, disabled, deceased, or receiving a distribution for a first-time home purchase, subject to a $10,000 lifetime limit for the home purchase.


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