For high school and college students, opening a Roth IRA with money they earned during the summer presents a powerful opportunity to gain practical experience saving for retirement. For parents, you want to help your child with the hands-on task of opening and funding their Roth IRA and aligning their investments with their goals. You’ll also want to understand how your child’s Roth IRA can influence financial aid for college.
Learning Points
Transforming Your Child’s Summer Job into a Lifetime Habit of Purposeful Saving
You probably remember your first few, real summer jobs.
Maybe you mowed lawns or painted houses. Or you were a lifeguard or a soccer camp instructor. Whatever your first job, those first paychecks likely created an amazing feeling of possibility and independence.
You can help your child channel their new energy and hard-earned income into an intentional, life-long habit of saving.
Most kids will have little trouble spending their paycheck and enjoying the present. However, those paychecks do not come with instructions on how to thoughtfully save or invest for the future.
While saving money can help your child work toward their goals, the lessons associated with it can help lay the foundation for financial responsibility.
This overview is designed to provide you, as a discerning parent, with the essential information to navigate this process smoothly. Beyond the numbers and the mechanics, this is a chance for you to have a meaningful dialogue with your child about money.
Explore key considerations for families with college bound kids considering a Roth IRA for their child.
Opening and Funding Your Child’s Roth IRA
If your child meets the Roth IRA eligibility requirements, and they are clear about the long-term goals associated with contributing to a Roth IRA, a logical next step is to open an account.
You’ll know the right financial institution(s) to evaluate. Working with a reputable institution that possesses a strong digital experience, low fees, and a wide range of low-cost investment options, for example, are factors to consider.
Custodial Roth IRA
If your child is under the age of majority where you live – it’s currently age 18 in Missouri – then you’ll want to evaluate custodial Roth IRAs. A custodial Roth IRA means that you, the parent/guardian, control the account until your child reaches the age of majority. If your child is already the age of majority, then you’ll want to evaluate opening a Roth IRA that your child controls and has access to.
Power of Attorney
If your child is the age of majority and you both feel it’s helpful for you (the parents) to maintain access to and the ability to manage the Roth IRA, you should consider adding Power of Attorney (POA) authority on the account.
With respect to your child’s Roth IRA, there are several types of Power of Attorney to evaluate, specifically:
- General Power of Attorney: Authorizes someone to act for you right away. It stops if you are incapacitated, which broadly speaking, means you become unable to make or communicate your own decisions. Of note, each state has its own specific legal definition of incapacitation.
- Durable Power of Attorney: Authorizes someone to act for you immediately, and it continues to be effective even if you become incapacitated.
- Springing Power of Attorney: This only lets someone act for you if, and when you become incapacitated.
You’ll want to understand whether the financial institution requires their own form of POA to be signed or if they’ll accept a previously executed POA document. Take the time to understand your options. A little bit of “extra” paperwork up front can prevent unpleasant surprises later.
Funding Your Child’s Roth IRA
Once you’ve selected the financial institution that fits your needs, you’ll also want to evaluate the specifics of how you’ll fund your child’s Roth IRA. Depending on your funding source(s), consider the following approaches:
- Ad hoc contributions. Establish a connection between your Roth IRA and your child’s bank account. After they deposit each paycheck, determine how much (in dollar terms) they’ll contribute.
- Automatic, recurring contributions. Predetermined amount that will be contributed according to a set frequency. This approach would pair better if each paycheck is expected to be for a similar amount and deposited according to a pre-set schedule.
- Single, lump sum contribution. This is more feasible once total, earned income is known. This could be a true-up contribution to achieve the maximum contribution amount, and from a variety of sources.
Your child’s earned income is a determining factor for the contribution limit for your child’s Roth IRA in any given tax year. Keep in mind that your child’s Roth IRA can be funded directly from their earned income, or from another source or sources.
A Common Question: Could I Gift Money to My Child to Fund Their Roth IRA?
Like a lot of topics in personal finance, the answer here is, it depends. If you plan to help fund your child’s Roth IRA, you’ll want to stay within the bounds of gifting, including the annual gift tax exclusion rules. You and your child would also still need to adhere to the applicable Roth IRA regulations, including earned income.
Funding Deadline
The 2025 Roth IRA contribution deadline is when taxes are due in 2026.
What is the Investment Goal for Your Child’s Roth IRA
If your child does open a Roth IRA, you’ll also want to be clear about how their contributions will be invested. Many long-term investors are seeking a sense of security when they create a financial plan and choose to invest. While peace of mind is relative for each of us, you can demonstrate to your child that thoughtful dialogue and planning can create more flexibility later in life.
You can also help your child focus on what they can control, and to pair long-term goals, like retirement, with a personalized, long-term investment strategy.
With your child’s Roth IRA, you can select what you invest in, as well as how much and when you invest. Depending on your child’s goals for their Roth IRA, mutual Funds, exchange traded funds (ETFs), and bonds are all potential investment options to consider.
IRAs cannot invest in life insurance or collectibles, such as art, antiques, gems, coins, or alcoholic beverages. IRAs can invest in certain precious metals only if they meet specific requirements.
Aligning Goals, Investments and Tax Considerations
Long-term investors like you recognize that after-tax returns matter. Investors can look to minimize the effects of taxes on investment returns by placing different types of investments in tax-advantaged accounts and taxable accounts based on the tax treatment of the account and their personal circumstances.
Long-term, retirement-focused investors generally see better tax-efficiency by holding equities – like mutual funds and exchange traded funds (ETFs) – in their Roth IRA.
Asset location is a broader lens that you can apply to all your investment accounts. It’s something that needs to be personalized to fit your specific facts and circumstances.
If you’re looking to learn more about how asset location and asset allocation can provide a tax-aware framework, and where your child’s Roth IRA might fit into the mix, here’s a short overview.
College Aid Considerations: FAFSA Treatment of Roth IRAs
Not Counted as Assets
Money held in a parent’s or a dependent student’s Roth IRA is not considered a countable asset when completing the Free Application for Federal Student Aid (FAFSA). This is consistent for the 2025-2026 FAFSA and is expected to continue beyond. The FAFSA primarily assesses a percentage of parental and student assets, but retirement accounts like Roth IRAs (and traditional IRAs) are exempt from this calculation.
Withdrawals Count as Income
While your child’s Roth IRA is not a countable asset on the FAFSA, any withdrawals taken from their Roth IRA will eventually be considered untaxed income to the student on the FAFSA. The FAFSA uses the “prior-prior year’s” income information.
By way of example, if you take a withdrawal in 2025 to pay for the 2025-2026 academic year expenses, this withdrawal will, ceteris paribus, be reported as income on the 2027-2028 FAFSA.
Impact on Student Aid Index (SAI)
Since withdrawals from your child’s Roth IRA are treated as student income, they can potentially increase the Student Aid Index (SAI). The SAI is the figure colleges use to determine how much financial aid a student is eligible to receive.
While each child’s situation will be different, the “prior-prior year” approach and the Income Protection Allowance (IPA) can dampen the effects of any small Roth IRA withdrawals. The IPA is intended to shield a student’s basic living expenses of a family from counting toward excess income that could be contributed to their education funding requirement. Currently, the IPA is $11,510 for a dependent student who is following the 2025-2026 SAI formula.[i]
Therefore, a withdrawal from your child’s Roth IRA could lead to a reduction in need-based financial aid eligibility in subsequent years.
Understanding your child’s educational aspirations and where your family is considering college is critical. Some colleges and universities may also have their own formulas for awarding grants and scholarships.
Funding your child’s Roth IRA with earned income does not negatively impact FAFSA calculations in terms of asset reporting. Any withdrawals to pay for college will be treated as the student’s untaxed income, potentially reducing financial aid eligibility in later years.
If you intend to use your child’s Roth IRA to help pay for college, your family will want to consider the long-term financial aid implications when deciding whether and when to utilize Roth IRA funds. Whereas if your child’s Roth IRA is earmarked for retirement, this is less of an issue.
Taking a Strategic View of Your Finances
We help busy parents and individual professionals like you develop financial plans to address questions like:
- How can we save for a fulfilling retirement beyond our 401(k) plans?
- What does it take to save for the kids’ education and make a lifetime of memories along the way?
- These causes are close to our hearts – what are our options to give even more meaningful support?
As your financial planner in Saint Louis, we can help you get organized and start feeling more confident that you are making progress towards your savings priorities.
Working with your financial planner can provide you with the right mix of accountability, collaboration, and long-term thinking.
When you know who and what are truly important, we can help you create incredible clarity about your spending and savings priorities. Clarity to confidently save for and spend on what matters.
If you’re ready to take the next step together, let’s talk.
Disclosure
This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.
[i] ‘Student Aid Index (SAI) and Pell Grant Eligibility Guide’. https://fsapartners.ed.gov/sites/default/files/2024-08/20252026StudentAidIndexSAIandPellGrantEligibilityGuide.pdf.