Using IRAs to Help Children Build Wealth Early

Can a child really have an IRA? Absolutely, and the sooner they start, the more powerful the results are. There’s no minimum age for owning an Individual Retirement Account. The only requirement is earning income. Babysitting, lifeguarding, mowing lawns, tutoring, or even helping in a family business all qualify. A little hustle now can translate into a lifetime of financial security later.

That early start makes an enormous difference. Imagine a teenager who contributes $7,000 a year from age 14 through 24 and earns an average annual return of 7%. By age 61, that account could grow to more than $1 million—even without a single additional contribution after age 24. That’s not financial magic; it’s compounding interest at work. Each year’s earnings generate their own earnings, creating a snowball effect that becomes more impressive over time.

Opening an IRA for a young worker is easier than many think. For minors, a parent or guardian can establish what’s known as a “guardian” or “custodial” IRA through most banks, brokerages, or online investment platforms. The child legally owns the account, but the adult manages it until the child reaches the age of majority—typically between 18 and 21, depending on state law. Once that milestone arrives, the account transfers fully to the child’s control.

Funding the IRA can also be a family affair. If a child earns money but prefers to spend it, parents or grandparents can step in by gifting the contribution amount. If the child has income for that year, the contribution qualifies—even if the deposit comes from someone else’s wallet. It’s a smart way for families to encourage saving habits early while reinforcing the importance of long-term planning.

When choosing between a traditional and a Roth IRA, the Roth almost always wins for children. Contributions to a Roth grow tax-free, and those contributions—not the earnings—can be withdrawn anytime without penalty or tax. That flexibility offers peace of mind while still allowing decades of compounding. In contrast, traditional IRAs offer a tax deduction that provides little benefit when a saver is in a very low tax bracket. Early withdrawals from traditional IRAs are also taxable and usually come with a 10% penalty.

Young savers have one powerful advantage: time. With decades ahead of them, they can afford to ride the market swings and capture higher long-term returns that stocks historically provide—around 7% annually after inflation. Playing it too safe can be costly. A conservative 3% return would shrink that million-dollar example to just $229,000.

Parents should also keep careful records. The child’s income must be properly documented and reported on a tax return. If earnings come from a family business, ensure the work is legitimate and fairly paid. Clean paperwork now prevents confusion later.

Starting a Roth IRA for a child does more than build a nest egg—it plants the seeds of discipline, responsibility, and financial independence. For parents looking to give their children a true head start, this simple step may be the most powerful gift of all.

Michelle Kuehner, ChFC®, MCEP®, is the President of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm.