Custodial Roth IRA for a Teen: Fidelity, Schwab, or a Youth Account First
The Short Verdict for a Working Teen
A teen with a real paycheck can usually open a custodial Roth IRA. For 2026, the IRS caps deposits at $7,500 or the teen’s earned income, whichever is lower. Fidelity’s Roth IRA for Kids lists $0 account fees and a $0 minimum, and Schwab offers a custodial IRA with $0 online stock and ETF commissions.
For most families, the deciding factor is not the broker. It is whether the teen has documented earnings and whether the money can stay invested for decades.
This guide is general education, not personal tax or investment advice. Account terms change, so confirm current fees, forms, and limits on each provider’s official site before opening anything.
The appeal is simple arithmetic. A teen usually pays little or no income tax on a first job, so paying tax now and withdrawing tax-free later is often a favorable trade. The catch is that the rules around eligibility, control, and withdrawals are stricter than a regular savings account.
What Counts as Earned Income for a Minor
- ● Wages on a W-2 count
- ● Logged side gigs count
- ● Gifts and allowance do not
Earned income is the gate, and age is not. IRS Publication 590-A defines compensation as wages, salaries, tips, bonuses, commissions, and net earnings from self-employment.
What does not count matters just as much. Interest, dividends, rental income, allowance, and birthday money are not compensation. A 15-year-old with $3,000 in gifts and no job cannot contribute a single dollar.
Paychecks from an employer
A W-2 job at a grocery store, pool, or summer camp is the cleanest case. The employer reports the wages, so proving eligibility takes one form. If the teen earned $4,200 in 2026, the contribution ceiling for that year is $4,200.
Babysitting, lawn mowing, and other side gigs
Informal work also counts as self-employment income, but the proof falls on the family. A simple spreadsheet listing dates, clients, hours, and payments goes a long way if anyone ever asks.
The IRS says a return is required once net self-employment earnings reach $400 or more. At that point, self-employment tax can apply, even for a minor. Families paying a teen for chores around the house should be careful, because the pay has to be reasonable for real work.
Work for a family business
Teens can be paid by a parent’s business, which is a common setup. The work should be genuine, age-appropriate, and paid at a market rate. Inflated wages created just to fund a Roth invite questions that are hard to answer later.
Fidelity, Schwab, and the Alternatives Side by Side
A custodial Roth IRA is only one way to put a teen’s money to work. The table compares it with the accounts families most often weigh against it.
| Feature | Fidelity Roth IRA for Kids | Schwab Custodial IRA | Fidelity Youth Account | UTMA/UGMA custodial brokerage | Custodial savings account |
|---|---|---|---|---|---|
| Needs earned income | Yes | Yes | No | No | No |
| Annual deposit cap | $7,500 or earnings, 2026 | $7,500 or earnings, 2026 | No IRA cap | No IRA cap (gift tax rules apply) | No IRA cap |
| Account fees and minimum | $0 fees, $0 minimum | $0 online equity commissions | No account fees, no minimum | Varies by provider | Varies by bank |
| Who makes trades | Custodian | Custodian | The teen, ages 13 to 17 | Custodian | Custodian |
| Teen can view before 18 | No, per Fidelity | Check with Schwab | Yes, through the app | Varies | Varies |
| Tax treatment of growth | Tax-free if qualified | Tax-free if qualified | Taxable | Taxable, kiddie tax may apply | Interest is taxable |
| Control transfers at | 18 to 25, by state | 18, or 25 in some states | Converts at 18 | State age of majority | State age of majority |
Fees and features are as of Oct 2026. Confirm the current details on the official site before choosing.
Two things stand out. First, Fidelity and Schwab look nearly identical on cost, so convenience and existing relationships usually decide it. Second, the Fidelity Youth Account is not a retirement account at all, which makes it a learning tool rather than a tax shelter.
How the Custodian Role Works Until Adulthood
- ● Adult opens and manages it
- ● Money belongs to the teen
- ● Control shifts at 18 to 25
An adult opens the account and makes the investment choices. Schwab describes the arrangement plainly. The custodian manages the assets until the child reaches 18, or 25 in some states.
The ownership question trips people up. All money in the account legally belongs to the child from the moment it is deposited. A parent cannot later move it to their own account, even if family plans change.
Fidelity notes that the child cannot view custodial account information before age 18. That is a real tradeoff for families who want the account to teach investing. A teen who never sees the balance learns little from it.
When control passes, the young adult gains full authority over the account. They can keep investing, change the holdings, or withdraw contributions. Families should talk through that handoff well before it happens.
Why a Roth Beats a Taxable Account for Small Paychecks
The core argument is about which tax rate applies. Roth deposits come from after-tax money, and qualified withdrawals later are tax-free. A teen in a zero or very low bracket is paying almost nothing to get that later benefit.
Time does the rest. As a purely hypothetical illustration, $2,000 growing at an assumed 7% per year for 50 years would reach about $58,900. Real returns vary widely and can be negative, so treat that as arithmetic, not a forecast.
A taxable account, by contrast, may owe tax on dividends and gains each year. Unearned income above certain thresholds can also be taxed at a parent’s rate under the kiddie tax. For a teen with earned income, the Roth usually avoids that friction.
For a broader look at how the two IRA types split taxes, see Roth IRA vs Traditional IRA. For most teens with low income, the Roth side is the more natural fit.
Withdrawals Before Retirement Are Less Locked Than They Look
Many parents assume Roth money is frozen until 59 and a half. That is only true for the growth. Fidelity states that contributions can be withdrawn without taxes or penalties at any time.
Earnings follow stricter rules. They come out tax-free and penalty-free once the owner reaches 59 and a half and the five-year requirement is met. Some exceptions exist, including up to $10,000 for a first-time home purchase.
This flexibility is useful but easy to misuse. Pulling contributions for a car at 19 removes decades of potential growth. The account works best when the money is treated as long-term from day one.
Mistakes That Create Penalties or Extra Paperwork
- ● Never exceed earned income
- ● Keep proof of the job
- ● Do not spend the cash twice
Most problems come from four predictable errors. Each one is avoidable with a little record keeping.
-
Contributing more than the teen earned. The cap is the lower of $7,500 or earnings for 2026. Excess contributions face a 6% excise tax for each year they stay in the account.
-
Counting gifts or allowance as income. Only compensation qualifies. A deposit backed by birthday money instead of work is an excess contribution.
-
No proof for informal jobs. Without a log or pay records, a babysitting income claim is hard to support. Keep the records with the tax files.
-
Assuming the parent keeps control. The account belongs to the child. Families who might need the money back should not fund an irrevocable account.
One subtle point catches families who match a teen’s paycheck. The teen does not have to deposit the exact dollars earned. A parent can contribute instead, as long as the total stays under the teen’s earnings for the year.
Which Account Fits Your Teen and Your Family
The right account depends on income, goals, and how much hands-on learning the family wants. These are general scenarios, not recommendations for any specific household.
Situation: A 16-year-old earns $5,000 lifeguarding on a W-2. A custodial Roth IRA at Fidelity or Schwab is a strong fit, with up to $5,000 allowed for 2026.
Situation: A 14-year-old babysits for cash and wants to pick stocks. The Fidelity Youth Account offers hands-on control for ages 13 to 17, with fractional shares from $1. A Roth can sit alongside it if the earnings are documented.
Situation: Grandparents want to give money but the child has no job. A Roth IRA is not available here. A UTMA or UGMA account, or a 529 plan for education, is the usual route.
Situation: The teen is saving for a car or college deposit within two years. A custodial savings account keeps the money stable and accessible. Our guide to the best high-yield savings account for students covers that side.
Situation: The family already has accounts at one broker. Opening the custodial Roth at the same firm usually means one login and easier transfers. The cost difference between Fidelity and Schwab is small enough that convenience can decide.
A Simple Sequence for the First Year
Start by adding up the teen’s earned income for the calendar year. Gather the W-2 or the gig log before choosing an amount.
Next, pick the provider and open the custodial account. Both brokers explain their custodial opening steps on their official sites, so confirm the current process there. Then decide on the investments, which for many beginners means a broad, low-cost index fund.
Contributions for a tax year can generally be made until the tax filing deadline the following spring. That gives families time to confirm final earnings before depositing. For background on fund types, see index funds vs ETFs for beginners.
Finally, set a calendar reminder for each new year of work. A teen who adds even a few hundred dollars every summer builds a habit along with the balance. That habit may matter more than any single deposit.
FAQ
Can you open a Roth IRA for a child with no job?
No. A Roth IRA for a minor needs earned income, such as wages or net self-employment earnings. Allowance, gifts, interest, and dividends do not count, so a child with no job cannot be funded, even by a parent.
Can parents put their own money into a teen's Roth IRA?
Yes. A parent, grandparent, or the teen can make the deposit. The combined total for the year still cannot exceed the teen's earned income or the annual IRA limit, whichever is lower.
Does babysitting money count for a custodial Roth IRA?
Generally yes, if the teen actually did the work and was paid a reasonable amount. Informal jobs like babysitting or lawn mowing count as self-employment income, so keep a simple log of dates, clients, and payments.
What happens to a custodial Roth IRA when the child turns 18?
Control passes to the young adult at the age of majority in your state, which Fidelity describes as typically between 18 and 25. The money already belongs to the child, so the custodian cannot take it back.
Does a custodial Roth IRA hurt college financial aid?
Federal aid forms generally leave retirement accounts out of the asset section. Withdrawals taken during the years the form looks at may be counted as income, so confirm the current rules on studentaid.gov before tapping the account.
Sources
- IRS - Retirement topics, IRA contribution limits — checked 2026-10-04
- IRS Publication 590-A, Contributions to Individual Retirement Arrangements — checked 2026-10-04
- IRS - Self-employed individuals tax center — checked 2026-10-04
- Fidelity - Roth IRA for Kids — checked 2026-10-04
- Fidelity - Fidelity Youth Account overview — checked 2026-10-04
- Charles Schwab - Inherited and custodial IRAs — checked 2026-10-04
- Charles Schwab - Pricing guide for individual investors — checked 2026-10-04
Some links may be affiliate links. We may earn a commission at no extra cost to you.
How this article was made: it was drafted with AI assistance from the official sources listed above, and its figures were checked against those pages on the dates shown. It is not based on personal hands-on testing.
Comments
Post a Comment