My teenager has a summer job!  It is time to consider opening a custodian Roth IRA for him/her. It is a great way to teach young people about saving and investing.  By starting at a young age, they have decades for their IRA contribution to growing tax-free. A $1k contribution by a 15-year-old will grow to close to $60k when he reaches 65 years old if the contribution can grow at 8.5% per year, a return level just below the return of the S&P 500 index since its inception. 

Why a Roth IRA?

 Individual Retirement Accounts (IRA) provide a tax advantage for retirement savings.  Individuals can choose between setting up a Traditional IRA and Roth IRA.  For a Traditional IRA, you contribute pre or after-tax earnings and your money will grow tax-deferred, but your withdrawal will be taxed without penalty after 59 1/2. For a Roth IRA, you contribute after-tax earnings and the contribution will grow tax-free and the withdrawal will be tax-free and penalty-free after 59 1/2.   A teenager will most likely have a lower tax rate now than many years later with higher earnings. It is therefore making more sense for them to have a Roth IRA, rather than a Traditional IRA. 

How much can they contribute?

IRS imposes a limit on the amount you can contribute to IRA accounts. For 2022, anyone younger than 50 can contribute up to $6k, or their entire earning in the year, whichever is less,  to a Roth IRA.  If your child makes $2000 working as a camp counselor, he can contribute up to $2000 to his Roth IRA account

How to set it up?

Many brokerage firms, such as Merrill Edge, Charles Schwab, and Fidelity,  offer custodian IRA or custodian brokerage accounts for kids. An adult needs to open the custodian IRA account for the teenager. The adult will maintain the control of the account until the teen reaches 18 or 21(depending on the state law) when he/she will have full control of the Roth IRA account.