Fall is the Perfect Time for Teens to Put Summer Job Money to Work in a Roth IRA
By Jodie Norquist, CIP, CHSP
The kids are back in school. They are lugging new backpacks and heading out to high school football games. Pumpkin spice is everywhere. But fall is also the perfect time for families to take a look at what their teens did over the summer and, more importantly, what they earned. For many teens, those summer paychecks can be more than just spending money. They can actually be the key to starting one of the smartest financial habits around: contributing to a Roth IRA.
If your financial organization offers Roth IRAs for minors, this is a golden opportunity to connect with families right now. Teens who worked hard over the summer can use that income to open or add to a Roth IRA, and the benefits are huge.
Let’s break down why this works, what the rules are, and how your organization can help families turn those summer jobs into lifelong financial confidence.
A Summer Job Means Roth IRA Contributions
There are no age requirements when it comes to opening and contributing to a Roth IRA. So teens don’t have to wait to open an IRA. If they earned money this summer, whether it was scooping ice cream, cleaning cabins, babysitting, or mowing lawns, they can contribute.
If the money a teen earns is treated as eligible compensation, it means he can make IRA contributions. So, if a 16-year-old earned $3,000 working at a coffee shop, he can contribute up to $3,000 to a Roth IRA. Even better, it doesn’t matter who actually makes the contribution. Parents and grandparents can pitch in on the teen’s behalf, as long as the contribution doesn’t exceed the teen’s actual earnings or the annual contribution limit.
Roth IRAs May Make the Most Sense for Teens
So why would parents lean toward a Roth IRA instead of a Traditional IRA for minors? Taxes. Most teens are in the lowest tax brackets (or often don’t owe income tax at all). That means the “tax break now” benefit of a Traditional IRA isn’t very useful.
With a Roth IRA, contributions are made with after-tax dollars, which are perfect for kids whose current tax rate is essentially zero. Then, decades down the road, those contributions and all the investment growth can come out tax- and penalty-free.
Here’s another bonus that parents love hearing: Roth contributions (the money the teen puts in) can be withdrawn at any time without taxes or penalties. That flexibility can come in handy later for college costs or even a first home purchase.
Let Them Know the Contribution Rules
IRA contribution limits are subject to annual cost-of-living increases, so they can change each year. Teens can contribute up to the annual IRA limit ($7,000 for 2025) or to their total eligible compensation for the tax year, whichever is less. So if a teen earned $2,500 this summer, the maximum she can contribute is $2,500.
As previously mentioned, teens must have eligible compensation in order to contribute. Some examples of eligible compensation for IRA contributions include wages, tips, salaries, and commissions. Revenue Procedure 91-18 states that to determine income for IRA contribution purposes, IRA owners can look at the amount shown in Box 1, Wages, tips, other compensation, reduced by any amount properly shown in Box 11, Nonqualified plans, on Form W-2, Wage and Tax Statement,. Cash payments, such as for babysitting, lawn care, or other services a teen might provide are also considered acceptable compensation. If teens receive cash for these types of services, they should keep detailed records of when they were paid and how much they received. It may be beneficial to consult with a competent tax advisor when trying to determine whether their earned income is considered eligible compensation for IRA contribution purposes.
How Financial Organizations Can Make it Easy
An IRA is a legal contract between the financial organization and the IRA owner. Most states restrict minors from signing a contract until they reach the age of majority, which can vary from age 18 to 21. A parent or legal guardian can co-sign the IRA documents and manage the IRA until the minor attains the age of majority.
Your financial organization’s compliance team, including its legal counsel, should establish procedures to follow when a minor opens an IRA. The procedures may be the same as when minors open other types of accounts at your organization.
If a parent or guardian is co-signing the IRA documents, including proof of receipt, the adult’s signature should clearly appear on each of the IRA opening document forms. The adult’s relationship to the minor should also be noted.
Why Roth IRAs Matter
Opening a Roth IRA for a teen isn’t just about saving for retirement. In the long run, teens are learning they can save a slice of their summer job money and invest it for the long run, planting a seed for responsible money management.
For financial organizations, it’s also a powerful relationship builder. These accounts can be the start of a lifelong customer relationship, with opportunities to serve not just the teen but also parents, grandparents, and eventually adult children.
Editor’s note: While teens may be the youths most likely to have earned income, and therefore be IRA-ready, the IRS does not have a minimum age requirement for making contributions to an IRA; so even pre-teens may be eligible to contribute.
