Custodial accounts, teen Roth IRAs,
and teaching kids about money.
Custodial accounts (an adult holds investments in a child's name until they turn 18 or 21), Roth IRAs for working teenagers, 529 college-savings plans versus custodial accounts, and the three financial concepts that matter more than anything else schools do not teach.
This page covers personal finance fundamentals that apply regardless of your view on Bitcoin or fiat currencyfiat currencyMoney declared legal tender by a government, not backed by a physical commodity. Its value rests on trust in the issuing government.Full definition.
This page covers US-specific accounts and tax law. Outside the US? The priority order is the same, the account names differ (ISAIndividual Savings Account (ISA)A UK tax-advantaged account where contributions are post-tax but all growth and withdrawals are tax-free.Full definition in the UK, TFSATax-Free Savings Account (TFSA)A Canadian tax-advantaged account where contributions are post-tax but all growth and withdrawals are tax-free.Full definition/RRSPRegistered Retirement Savings Plan (RRSP)A Canadian tax-deferred retirement account; contributions reduce taxable income and growth is tax-deferred until withdrawal.Full definition in Canada, Super in Australia, etc.). Other countries have similar concepts (Canada has RESP, the UK has Junior ISA) with different rules.
If your teen has earned income (summer job, 1099 work, any real job), open a custodial Roth IRA and contribute on their behalf up to their earned income amount. A one-time $1,000 investment at 16 would reach about $50,654 nominally at 67 under the constant 8% effective annual return illustration below, not a forecast. At assumed 2.5% annual inflation, that is about $14,378 in starting-year purchasing power. Starting later leaves less compounding time, not no opportunity to save.[1] 529 for college savings is better than UTMA because of financial aid treatment. Teach compound interestcompound interestEarning interest on your interest. Your returns reinvested to earn even more returns over time.Full definition, the asset/liability distinction, and why cash loses value, in that order.
On this page
Custodial accounts (UTMA/UGMA)
Investment accounts you open for a minor. You control until they reach majority (18 or 21 depending on state) verify×DON'T TRUST, VERIFYClaim: UTMA/UGMA transfer age is 18 or 21 depending on state.Verify at: SEC custodial accounts ↗ Source 1 in the list belowVaries by state. Some allow custodian to extend to 25.. After that, the account is theirs with no restrictions.
- UTMA (Uniform Transfers to Minors Act): broader range of assets allowed, including real estate and patents.
- UGMA (Uniform Gifts to Minors Act): limited to financial assets.
Most parents use UTMA accounts.
Tax: "kiddie tax." Child's unearned income above about $2,700 is taxed at the parent's marginal rate. Verify the threshold each year. Not as tax-efficient as a Roth IRA.
- Best for: teaching kids about investing, gifting money with flexibility.
- Not best for college savings: UTMA assets count heavily against financial aid. Use a 529 for that.
- Not best for retirement savings: use a Roth IRA if the child has earned income.
Key features
- No contribution limits, though large gifts trigger gift-tax rules above the annual exclusion ($19,000 per donor per recipient in 2026) verify×DON'T TRUST, VERIFYClaim: 2026 annual gift-tax exclusion is $19,000 per donor per recipient.Verify at: IRS Gift Tax FAQ ↗ Source 2 in the list belowIRS publishes the annual exclusion in its yearly inflation-adjustment Rev. Proc..
- No income restrictions on the donor or recipient.
- Taxed at the child's tax rate, until the "kiddie tax" kicks in.
The critical catch
When the child reaches the age of majority, the account becomes theirs with no strings. An 18- to 21-year-old (depending on state) has full legal access to spend the money however they choose. Think carefully before using a custodial account for college funding; a 529 plan has better tax treatment for that purpose.
Roth IRA for working teens
If your child has earned income (W-2 job, 1099 work, modeling, acting, babysitting documented properly), they can contribute to a Roth IRA. Contribution limit: lesser of $7,500 or earned income (2026) verify×DON'T TRUST, VERIFYClaim: 2026 Roth IRA limit is $7,500, lesser of earned income.Verify at: IRS IRA limits ↗ Source 3 in the list belowAnnual adjustment..
A custodial Roth IRA works the same as a regular Roth IRA but is held in the child's name with a parent as custodian.
If your 15-year-old earns $3,000 mowing lawns or working a summer job, they can contribute up to $3,000 to a custodial Roth IRA.
Illustration, not a promised return: start with $1,000 at age 16, hold for 51 years to age 67, assume a constant 8% effective annual nominal return compounded annually, reinvest all returns, and make no later contributions or withdrawals. Ignore fees and taxes for this example. The nominal future balance is $50,654.
Under those same assumptions, $5,000 becomes $253,269 nominally. With constant 2.5% effective annual inflation, the balances are $14,378 and $71,889 respectively in starting-year purchasing power. Formula: nominal = principal × 1.08^51; real = nominal ÷ 1.025^51. Amounts are rounded to the nearest dollar. Inflation and investment returns will vary; losses are possible and fees reduce results.[1]
The Roth IRA principal can be withdrawn at any time for any reason (it is after-tax money). The growth is tax-free after 59½.
The gift approach: you can give the contribution to your child even if they spend their actual paycheck. As long as they have earned income equal to the contribution amount, the contribution is valid. You get to fund your kid's Roth without requiring them to save their summer-job money.
Where to open it: a custodial Roth IRA at Fidelity or Schwab. Fidelity and Vanguard both offer custodial Roth IRAs with no minimum balance. Bitcoin in a custodial Roth via IBIT or FBTC: extreme long-term exposure (50+ year horizon) in a tax-free wrapper.
529 vs custodial for college
529 is generally better for college savings. Tax-free growth for qualified education expenses. Minimal financial aid impact compared to UTMA. Can now be rolled into a Roth IRA (up to $35,000 under SECURE 2.0) if not used for education. See 529 Deep Dive.
Teaching kids about money
Three concepts that matter more than anything else:
- Compound interest. Show it visually with real numbers. The compound interest visualizer is built for this. Watching $100/month grow into a six-figure number over decades is a transformative visual for a teenager.
- Assets vs liabilities. Things that pay you (stocks, bonds, rental property, Bitcoin appreciation) vs things that cost you (car payments, credit card debt). Most adults don't understand this distinction.
- Why cash loses value. The purchasing powerPurchasing powerWhat money can actually buy, not the number on the bill or in the account. Inflation shrinks it over time: by the BLS consumer price index, it takes more than $8 today to buy what $1 bought in 1971. Same dollar, much less buying ability.Full definition math. See Purchasing Power. Kids who understand this make different career, saving, and investing decisions.
Age-appropriate approaches:
- Under 10: physical money, spend/save/give jars.
- 10-14: bank account, small investing introduction.
- 14-18 with a job: Roth IRA, how taxes work, the order of operationsOrder of operationsA default sequence for spare money after essentials and minimum payments: a starter emergency fund, any employer retirement match, high-interest debt, a full emergency fund and tax-advantaged accounts (HSA, Roth IRA, more 401(k)), then taxable investing. Vesting, unstable income and near-term goals can shift it.Full definition.
Bitcoin for kids: the framing that works is simple. "There will only ever be 21 million Bitcoin. There are 8 billion people. What do you think happens to the price over your lifetime?" Let them reason through it. Don't lecture.
The goal is to build habits and intuitions before they matter.
By age 10
The concept that money is exchanged for value. Work earns money, money buys things, and some things are worth the trade and some are not.
By age 15
- Compound interestcompound interestEarning interest on your interest. Your returns reinvested to earn even more returns over time.Full definition. Show a real calculator. $100 at 7% for 50 years versus spending $100 now.
- The difference between an asset (something that pays you) and a liability (something you pay for).
- Why credit-card debt at approximately 21% APRAnnual Percentage Rate (APR)The yearly cost of borrowing money, shown as a percentage.Full definition is devastating.
By 18
- How to file taxes (or at least what a W-2 is and what withholding means).
- What a Roth IRA is and why to open one with their first real income.
- How to read a pay stub.
The most effective teaching
- Let them manage their own money (allowance or earnings) and make real decisions.
- Do not bail out bad decisions within reason. The lessons from losing money on a bad purchase at 12 are far cheaper than at 32.
The financial reality of having children
This section exists not to discourage anyone from having children. It exists because most people do not price the decision before making it, which leads to financial stress that could have been planned for.
The USDA's latest estimate puts the cost of raising one child from birth through age 17 at $233,610 for a middle-income married couple in 2015 dollars, about $317,000 in 2025 dollars verify×DON'T TRUST, VERIFYClaim: USDA estimated the cost of raising a child born in 2015 through age 17 at $233,610 for a middle-income married-couple family, in 2015 dollars: about $317,000 in 2025 dollars.Verify at: USDA Expenditures on Children by Families ↗ Source 4 in the list belowUSDA's 2017 report on children born in 2015 is the latest in the series while USDA reviews its method. The 2025-dollar figure is this page's arithmetic: $233,610 x 321.943 / 237.017, the BLS CPI-U annual averages for 2025 and 2015.. This excludes college costs.
What this does not capture
- Opportunity costopportunity costWhat you silently give up when you pick one option over another. Spending $100 today on dinner means giving up whatever that $100 could have grown into if you had invested it instead.Full definition of reduced career advancement during early childcare years
- One-to-two income transition period if one parent reduces work
- Geographic constraints (proximity to family, school districts) that affect housing costs
- Emotional and relationship investment that can affect career focus
What this means for financial planning
- Having children accelerates the need for a deeper emergency fund
- It accelerates the need for life insurance and disability insurance
- It typically reduces the savings rateSavings rateThe share of income you save or invest, usually (income minus spending) divided by income. Saving $1,000 of $5,000 take-home pay is a 20% rate. Whether you use gross or take-home pay, and whether 401(k) contributions and an employer match count, changes the number, so compare rates only on the same definition.Full definition in early years
- It adds a FIREFinancial Independence, Retire Early (FIRE)A strategy of aggressively saving and investing to reach financial independence decades before traditional retirement age.Full definition constraint: healthcare before Medicare and education costs need separate planning
How to factor it into a FIRE calculation: add estimated annual child costs to your baseline expenses, recalculate your FIRE number, the delta is the financial cost of that specific lifestyle choice. Use the Cost of Living Calculator to model household scenarios with children.
This is not a reason not to have children. It is a reason to plan for them with the same rigor you plan everything else.
Where to go from here
Sources
Bracketed numbers and verify badges in the text link to these sources. Figures, rates and rules change: check each source’s date before acting on it.
Last updated . Not financial advice. US-specific accounts. Disclosures · How pages are reviewed