Custodial Accounts, Teen Roth IRAs, and Teaching Kids About Money

Life Stages · Parenting

3 MIN READ

Custodial accounts, teen Roth IRAs,
and teaching kids about money.

UTMA/UGMA custodial accounts, Roth IRAs for working teenagers, 529 vs custodial accounts, and the three financial concepts that matter more than anything else schools don't teach.

READING TIME: 8 MIN

This page covers US-specific accounts and tax law. Outside the US? The priority order is the same, the account names differ (ISA in the UK, TFSA/RRSP in Canada, Super in Australia, etc.).

THE SHORT VERSION

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. $1,000 invested at 16 grows to approximately $54,000 at 67 at 8% average returns. The time advantage disappears the year they turn 18 if you haven't started. 529 for college savings is better than UTMA because of financial aid treatment. Teach compound interest, the asset/liability distinction, and why cash loses value, in that order.

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 ↗Varies by state. Some allow custodian to extend to 25.. After that, the account is theirs with no restrictions.

Tax: "kiddie tax." Child's unearned income above about $2,500 is taxed at the parent's marginal rate. 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.

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 $7,000 or earned income (2026) 🔍 verify×DON'T TRUST, VERIFYClaim: 2026 Roth IRA limit is $7,000, lesser of earned income.Verify at: IRS IRA limits ↗Annual adjustment..

WHY THIS IS EXTRAORDINARY

$1,000 contributed at age 16 at 8% average return to age 67: approximately $54,000.

$5,000 contributed at 16: roughly $270,000 at 67. Every $1 contributed at 16 is worth $54 in today's dollars at retirement (in nominal terms).

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: Fidelity Youth Account for under-18, or a custodial Roth IRA at Fidelity or Schwab. 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 power 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 actually work, the order of operations.

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.

-> 529 Deep Dive -> Roth IRA Guide -> Compound Interest Visualizer -> New Graduate, the next life stage -> Bitcoin ETF Guide, IBIT in a custodial Roth

Last updated 2026-04-19. Not financial advice. US-specific accounts.