Your Teen Made Summer Money. The Roth IRA Move to Make Now

Summer jobs are wrapping up. If your teen scooped ice cream, lifeguarded, mowed lawns, or ran a little business this summer, there's a pile of money sitting in a checking account right now, and a plan forming to spend all of it before school starts.

Let some of that happen. Spending money you earned is part of the point.

But this exact moment, the week the last paycheck lands, is the single best money-lesson window of the year. Your teen has real earned income, which unlocks something most families never use: a Roth IRA in a teenager's name. Financial writers this month have been making the case that a few summers of contributions can quietly become hundreds of thousands of dollars by retirement. The math holds up, and the account takes about twenty minutes to open.

From time, not from big deposits. A recent Yahoo Finance piece walked through how a teenager who invests summer-job money in a Roth IRA can end up hundreds of thousands of dollars ahead by retirement, and the mechanics are just compounding with a very long runway.

Run one version yourself. Say your teen puts $3,000 a year into a Roth IRA for four summers, ages 15 through 18, and never adds another dollar. At an average 8% annual return, that $12,000 grows for roughly 45 to 50 years and lands somewhere between $400,000 and $600,000, tax free.

The same $12,000 invested at age 30 grows to a fraction of that. Nothing your teen does with money this decade will ever be as valuable as starting early. A 15-year-old's biggest financial asset isn't the paycheck. It's the calendar.

A custodial Roth IRA is a retirement account a parent or guardian opens and manages for a minor who has earned income. The money goes in after tax, grows tax free, and comes out tax free in retirement. When your kid reaches the age of majority in your state, usually 18 or 21, the account transfers to their full control.

Two rules make it work for teens. First, contributions require earned income: wages, tips, or self-employment money. Allowance and birthday cash don't count. Second, the annual cap is the teen's total earned income for the year or the IRS limit, whichever is smaller. For 2026 that limit is $7,500.

So a teen who earned $2,400 this summer can contribute up to $2,400. And here's a detail parents love: the contribution doesn't have to be the teen's actual dollars. More on that in a minute.

This is the first question careful parents ask, and the answer is reassuring. Retirement accounts, including a custodial Roth IRA, are not counted as assets on the FAFSA. A regular savings account in your kid's name actually weighs against aid eligibility more than a Roth does.

There's flexibility on the other side too. Contributions, the money you put in, can be withdrawn at any time, for any reason, without taxes or penalties. Only the growth needs to stay put until retirement age to keep its tax advantages.

That makes the Roth a surprisingly forgiving place for teen money. If your kid truly needs those dollars for tuition or a car at 20, the contributions come back out. But if they never touch it, and most people don't once money feels "filed away," it compounds for five decades. Worst case, it's a savings account with a locked growth bonus. Best case, it's the head start everyone wishes they'd had.

Yes, and this matters for kids who ran their own operations this summer. Lawn mowing, babysitting, a slime stand at a business fair, reselling sneakers, freelance design for neighbors: self-employment income is earned income, and it qualifies for Roth contributions.

The catch is record keeping. Self-employed teens should track what they earned, from whom, and when, because there's no W-2 backing it up. A simple log with dates and amounts is enough. If net self-employment income passes $400 for the year, there are also self-employment tax rules to handle, which is a lesson in itself.

If your teen's business is becoming a real thing rather than a one-week stand, this is a good moment to treat it like one. Even a one-page plan helps: what they sell, what it costs, what they keep. Planning tools like Foundra are built for exactly this kind of first-business thinking, and a teen who writes down their numbers is doing more planning than most adults with side hustles.

Most major brokerages offer custodial Roth IRAs with no minimums and no fees: Fidelity, Schwab, and Vanguard all do. Fidelity also runs its Youth Account for 13-to-17-year-olds, and Schwab launched a Teen Investor account this spring that pairs investing access with a built-in education course.

The process is about twenty minutes online. You'll need your ID, your teen's Social Security number, and a bank account to fund from. Choose the custodial Roth IRA specifically, not a regular custodial brokerage account; the tax treatment is the whole point.

One honest note: this is general information, not personalized financial advice. Account rules, state ages of majority, and tax details vary by family situation, so check the details with the brokerage or a tax professional if anything about your setup is unusual.

Not with the word "retirement." Fifty years away might as well be fiction to a 16-year-old. Pitch ownership and matching instead.

The match is the move that works. Tell your teen: for every dollar of summer money you put in, I'll add a dollar. The IRS allows this; contributions just can't exceed the teen's earned income for the year. Your kid keeps spending money, the account still gets funded, and they learn what an employer match will mean later.

Then hand over the controls. Let them help pick the investments and watch the balance. Show them the compound growth chart with their own numbers in it. Kids who can see "this is mine and it's growing" tend to protect it fiercely.

And keep the ask modest. Even $500 from a summer of earnings, matched to $1,000, is a real start. The habit matters more than the amount, because next summer the conversation is already normal.

Keep it boring. A low-cost total market index fund or S&P 500 index fund is the standard answer for money with a 50-year runway, and it has the side benefit of being explainable to a teenager: you own a tiny slice of the 500 biggest companies in America.

Avoid the temptation to make it exciting. A Roth funded with summer wages is not the place for single stocks your teen saw on social media, and definitely not for crypto experiments. If they want to gamble on a meme stock, that's a separate conversation with separate, smaller money.

The empty-account trap catches many families: money gets contributed and then sits in cash, uninvested, for years. After the transfer lands, take the extra five minutes together to actually buy the fund. Set it and mostly forget it. The whole strategy is one good decision followed by decades of not touching it.

The end-of-summer checklist, in order:

• If your teen earned money this year, they qualify for a custodial Roth IRA. Wages and side hustle income both count.
• The 2026 contribution cap is their total earned income or $7,500, whichever is smaller.
• Parents can match or fund the contribution; it doesn't have to be the teen's own dollars.
• Contributions can come back out anytime, and the account doesn't count against FAFSA. The downside risk is small.
• Invest it in a broad index fund, then leave it alone. Time does the heavy lifting.

One conversation this week, twenty minutes online, and a teenager's summer of scooping ice cream becomes the oldest, hardest-working money they'll ever own.

My teen only earned $800 this summer. Is it even worth it? Yes. $800 invested at 15 can be worth $25,000 or more by retirement. And the habit of contributing is worth more than the first deposit.

Can I contribute for my teen if they already spent their paycheck? Yes. As long as the teen had earned income this year, anyone's dollars can fund the contribution up to the amount they earned.

Does babysitting cash count if there's no W-2? It counts as self-employment income. Keep a simple written log of dates, payers, and amounts as your documentation.

What happens to the account when my kid turns 18? It converts to a regular Roth IRA in their name and they take full control. That's a good milestone for a handoff conversation about what the money is for.

Is a Roth better than a regular savings account for a teen? For long-term money, usually, because growth is tax free and it stays invisible to financial aid formulas. For money they'll spend within a year or two, a high-yield savings account is the better bucket.

1. Yahoo Finance: How teens can turn a summer job into an extra $500,000 in savings
2. U.S. News: Best investment accounts for kids and teens
3. U.S. News: Investing for teens, how to invest money as a teenager
4. Fidelity: Summer jobs and money lessons for teens and college students
5. Sunward: Investing basics for teens