How to Turn Your Kid’s Summer Earnings Into $100,000

Your child could earn over $100,000 by working at a pool or an ice cream shop this summer. The trick: you have to invest all their earnings until they’re retired.

That’s the idea behind a custodial Roth IRA.

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I had no idea such accounts existed when I was a teenager, folding golf polos at an outlet mall. If I had, I really think I would have contributed at least some of my minimum-wage earnings to an account. Around 55% of young people worked last summer and I have the sneaking suspicion more would open one of these accounts if they understood the upside.

“The key is compound growth,” said Catherine Valega, founder of Green Bee Advisory in Boston. Custodial Roth IRAs allow a child’s earned income to grow tax fee and the accounts can be so lucrative because they add a powerful ingredient to one’s investment portfolio: time.

The math is simple. Let’s say a 15-year-old teenager set aside $2,000 from a single summer of earnings. Let’s also assume an annual 8% rate of return, in the ballpark of a standard estimate for stock-market returns. By retirement age at 65, those earnings would compound to about $100,000. Yes, inflation is likely to mean those dollars are worth less in the future. But as Valega told me: “No one ever regrets money in retirement.”

There are rules, of course. There’s no minimum age, but an account must be opened and managed by an adult. Parents can make contributions, but they cannot exceed what a child “earned” in taxable wages. And there is a current contribution limit of whichever figure is less: $7,000 or the sum total of earned income for the year.

Edward Jastrem’s father managed an account for him and he is very grateful now. Long before Jastrem worked as chief planning officer at Heritage Financial in Westwood, Massachusetts, he had a teenage job as a bagger and cashier at a supermarket. Unbeknownst to him, Jastrem’s father set up a custodial Roth for him and only revealed it to him senior year of high school. That financial cushion felt like a great way to kick off Jastrem’s departure into the real world.

David Frisch, founder of Frisch Financial Group in Melville, New York, sees few downsides to these accounts. In fact, you can even withdraw contributions tax- and penalty-free at any time. (You may, however, have to pay penalties or taxes when withdrawing the earnings on those contributions.) But one issue Frisch said to keep in mind is cash flow. Depending on a family’s income, some teens may need to rely on the income they earn from work for living expenses. But custodial Roths allow teens to contribute even small amounts to take advantage of the compounding effect.

“It builds good financial behavior,” said Ryan Marshall, partner at ELA Financial Group in Wyckoff, New Jersey. “Introducing the concept of paying yourself first helps form healthy habits before lifestyle inflation creeps in.”

Marshall says these accounts work best when parents are involved. He suggests parents “match” contributions (just like a grown-up employer) or guide the conversation about saving and investing, framing it not as a sacrifice, but as a step toward independence.

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