Your Teen’s Not Too Young For a Roth IRA

April 09, 2024

It's an exciting time: Your young adult's 18th birthday is just around the corner and they're probably questioning what to do next, after this important milestone occurs.

How long can I wait before declaring a college major?

Should I join the military?

What if I start working now and bypass college?

Am I too young to invest in a Roth Individual Retirement Account? 1

That last question is unlikely to be on your teen's mind, or yours either, for that matter. However, a Roth IRA can help them start saving now and get income tax benefits they wouldn't receive on a typical savings account.

Understanding IRAs

An IRA isn't an investment itself. Think of it as a container where you can hold all kinds of investments — such as share certificates, mutual funds, stocks or bonds — you choose the investments.

There are two types of IRAs: Traditional and Roth. A Traditional IRA acts like a savings account with immediate tax benefits because contributions use pre-tax dollars, reducing taxable income. However, because contributions are earmarked for retirement, early withdrawals incur penalties in addition to taxes if funds are withdrawn before age 59 ½.

Unlike a traditional IRA, a Roth uses after-tax contributions and earnings can grow free from income tax. While a Roth won't reduce taxable income because contributions are after-tax dollars, it's still a great way to build savings. And a Roth allows you to withdraw contributions at any time without penalties which is a nice option for young adults. But be aware, any Roth earnings withdrawn prior to age 59½ are subject to taxes and penalties. In order to derive the tax-free earnings benefit on a Roth withdrawal, the account must be opened for at least 5 years and the owner must be age 59 ½ or older.

An Easy Way to Save

Best of all, a Roth IRA is a simple way to potentially save and earn more. Thanks to compounding interest, contributing the annual maximum each year could help your teen build savings with minimal effort. Historically, investing provided average annual returns of more than 10% for stocks, 6% for corporate bonds, 5.5% for Treasury bonds and 3.5% for cash or cash equivalents such as short-term Treasury Bonds.2 Compare this to typical savings accounts, earning a national average of 0.59% APY, and you can see why a Roth with the right investment allocation can make financial sense.3

A Roth IRA can be particularly advantageous to young people whose annual income from part-time or seasonal jobs typically place them in a lower marginal tax rate,3 meaning the income tax reduction benefits of a traditional IRA would be reduced. And if you have children under age 18 who have earned income, you can open a Custodial Roth IRA for them with the same benefits as a regular Roth.

Roth IRA Eligibility

Everybody must meet specific eligibility requirements before they can open a Roth account in their name. For instance, they must:

  • Be at least 18 years of age.
  • Have earned income from a job, this does not include income generated from savings or investment accounts.
  • For 2024, have a modified adjusted gross income (MAGI) under $161,000 if single or under $240,000 if married filing jointly. Individuals and married couples earning more than the basic MAGI eligibility amounts may be able to qualify for reduced annual contributions.1

Other Considerations

Since the IRS sets contribution limits and may change annually, your financial plan should be periodically reviewed to ensure you stay on track with your retirement goals. It's wise to consider a Roth IRA as a supplement to employer-sponsored plans such as a 401(k), 403(b) or similar retirement plans that offer higher annual contribution limits. The IRS may also change plan participation requirements or qualified distribution standards.


  1. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
  2. Risk and Reward FINRA
  3. Source: