Empowering Lifelong Lessons: Your Child’s Roth IRA and Their Summer Jobs

Whether your college-age child is already home for the summer or your high schooler is counting down the days until their last exam, you can start planning now to help them evaluate saving for their own financial future. For young investors navigating the summer job market, learning how to save for retirement, no matter what career they choose, is a lifelong behavior worth fostering. One long-term investment account for you and your child to consider is a Roth IRA. Explore the details of contributing to a Roth IRA and evaluate whether it aligns with your savings priorities.

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 golf caddy. Perhaps you worked in food service or retail. 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.

Saving money can help your child work toward their goals and the lessons associated with it can help lay the foundation for a lifetime of financial responsibility.

Even though retirement is probably one of the last things on your child’s mind, let’s dive into some of the essential details and considerations for your child’s Roth IRA. This overview is designed to provide you, as a discerning parent, with the essential information to navigate this topic smoothly. Beyond the numbers and the mechanics, this is a chance for you to have a meaningful dialogue with your child about money.

What is a Roth IRA?

If this is your child’s first foray into retirement planning and investing, it can be helpful to start at the beginning.

An Individual Retirement Account (IRA) is a tax-advantaged personal savings account generally used for setting money aside for retirement.

Your child’s Roth IRA contributions consist of after-tax dollars – money they’ve already paid income tax on. Once your child invests their money is in their Roth IRA, it has the potential to grow tax-free. This means you won’t owe taxes on any earnings, such as investment gains, interest, or dividends.  

A Roth IRA can be a great way to teach your child the basics of saving and investing, as well as to help instill positive, long-term investing behaviors.

Evaluating Your Child’s Roth IRA: Did Your Child Earn Compensation?

If your child plans to earn income for a job this summer, evaluate whether opening (and funding) a Roth IRA aligns with your family’s savings priorities.

Depending on your child’s employment situation, their earned income could be from their salary, hourly wages, tips, bonuses, or commissions. So, if they plan to work at their first internship or as a lifeguard and they were paid hourly, that would be considered compensation. Things like interest income and dividend income would not be viewed as compensation.

Keep in mind that certain gigs that don’t require taxes to be withheld, like part-time babysitting, might cause your child to not have earned income. The details do matter, and personalizing a decision often means working with your team of professionals. Because topics like funding a child’s Roth IRA, like so many others in financial planning, intersect with the world of tax, make sure you coordinate with a qualified tax professional.

If you, or a loved one, have a goal of helping fund your child’s retirement account, or creating additional financial flexibility for them later in life, a Roth IRA is just one of many ways to achieve your goal.

Contribution Limits

Your child can open and contribute to a Roth IRA if they earned taxable compensation during the year.  Your child’s Roth IRA contributions consist of after-tax dollars – money they’ve already paid income tax on. In 2025, a taxpayer can contribute up to the following amounts into a Roth IRA:

• $7,000 per person if you are age 49 or younger.

• $8,000 per person if you age 50 or older.

There are no age limits on making regular contributions to traditional IRAs or Roth IRAs.

Keep in mind, IRA contribution limits are per taxpayer (not per account). If your child has both a Roth IRA and a traditional IRA, they aggregate their contributions across both accounts up to the applicable limit.

Income Limitations

In 2025, there are modified adjusted gross income (MAGI) phase-out ranges for taxpayers making contributions to a Roth IRA. Those phase-out ranges are as follows:

In 2025, there are adjusted gross income phase-out ranges for taxpayers making contributions to a Roth IRA.

• For single and head of household taxpayers, the income phase out is between $150,000 and $165,000.

• For married couples filing jointly, the income phase-out range is between $236,000 and $246,000.

While it’s unlikely your child’s summer job is going to exceed these limits, it’s important to know the rules and to coordinate with a qualified tax professional.

The Potential for Tax-Free Growth

Unlike a traditional IRA, your child’s Roth IRA contributions consist of after-tax dollars – money they’ve already paid income tax on.  This allows your child’s Roth IRA contributions to stay invested tax-free provided they follow the IRS’ Roth IRA rules.

Tax Deductibility

There is no tax deduction currently for your child’s Roth IRA contributions.

Depending on their goals and individual circumstances, children can evaluate whether they want to contribute to a traditional IRA. For many American families with children who are working part-time or only during the summer, those children are generally in the lowest tax brackets. And so, it’s unlikely that children in this situation would need to deduct traditional IRA contributions. Something to keep in mind, but there is no single, universal rule.

Withdrawal Sequence

When you or your child invests in a Roth IRA, there are specific withdrawal rules to consider. Roth IRA withdrawal rules are relatively more flexible than those for traditional IRA or 401(k) plans. When you need to access your Roth IRA funds, the order of withdrawals is as follows:

• Contributions (1st)

• Conversions (2nd)

• Earnings (3rd)

If you think your child might need to use their Roth IRA funds before hitting retirement age, whether to pay for school or a first home, keep this withdrawal sequence in mind.

If your child experiences an unexpected expense that fully depletes their emergency fund later in life, they can distribute some or all the principal contributions from their Roth IRA at any age for any reason without taxes or penalties.

Qualified Distributions

A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements:

• It is made after the 5-year period, beginning with the first tax year for which a contribution was made to a Roth IRA set up for your benefit. This period begins January 1 of the year a contribution is made to any Roth IRA.  Starting this five-year holding period sooner can create additional flexibility.

• The payment or distribution is:
  • Made on or after the date you reach age 59½;
  • Made because you are disabled;
  • Made to a beneficiary or to your estate after your death; or
  • One that meets the requirements listed for first-time home buyers (up to a $10,000 lifetime limit).

So, if you’re over 59½ and have held your Roth IRA for at least five years, you can withdraw earnings with no tax or penalty. This is in addition to the contributions you can withdraw with no taxes or penalties.

If you’re under the age 59½ and take a Roth IRA distribution within five years of the conversion, you’ll pay a 10% penalty unless you qualify for an exception.

For many young investors, the five-year holding period should not be the primary driver for funding a Roth IRA.

Required Minimum Distributions

Required minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts, which include traditional IRAs, SIMPLE IRAs, and SEP IRAs, each year.

There are no required minimum distributions (RMDs) for your child’s Roth IRA while the original account holder is alive.

Looking to the future, if your child intends to leave Roth IRA assets to heirs, they should plan on navigating the required minimum distribution rules. These include rules added by the current iteration of Setting Every Community Up for Retirement Enhancement Act, or SECURE 2.0.

Downsides to Accessing Roth IRA Funds Before Retirement

As your child starts their journey of building their own retirement savings with a Roth IRA, it’s important to understand the potential pitfalls of accessing those funds earlier than they planned.

Since your child’s Roth IRA is generally intended as a retirement savings vehicle, significant, unplanned early withdrawals from your child’s Roth IRA can disrupt their long-term financial plan and goals.

While the flexibility of withdrawing contributions tax-free and penalty-free is a notable feature, dipping into the contributions before retirement has the potential to derail a long-term investment time horizon. Imagine the years of potential tax-free compounding lost.

Another downside to accessing Roth IRA assets before retirement is the potential loss of tax-free earnings. The beauty of your child’s Roth IRA lies in its potential to compound earnings without being subject to annual taxation. Early withdrawals from your child’s Roth IRA earnings can detract from this crucial benefit.

As a parent, you can help your child over their investing lifetime by helping them establish successful investor behavior. Repeated early withdrawals can erode a healthy habit of saving and investing.

Helping your young investor establish consistent, disciplined savings is a cornerstone of long-term financial health. Regularly tapping into their retirement funds, even if seemingly for valid reasons, can create a pattern of relying on these savings for non-retirement needs. This can undermine the very purpose of your child’s Roth IRA and potentially hinder their ability to retire in a way that’s aligned with their goals.

Creating Teachable Moments

When you’re chatting with your child about saving and spending, you can help them look beyond the numbers immediately in front of them. The amount of their paycheck and automatic contributions matter

You can teach your children about the power of compounding, the nuances of delayed gratification, and long-term decision making. Starting the conversation early can help your child become familiar with saving and investing. Your child’s Roth IRA is just one of many investment accounts to consider, and the right choice will depend on your personal goals and circumstances.

You can share your own investing journey and help the next generation feel more comfortable evaluating their saving and investing options.

It could inspire them to proactively learn more, ask questions, and seek out new information that better prepares them for the future.

You can help your child evaluate investing a portion of their summer earnings through a Roth IRA, imparting lifelong lessons about financial independence and the long-term power of smart saving.

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.