Teaching kids about money.
Custodial accounts, custodial Roth IRAs, and the basics.
UTMA/UGMA custodial accounts, custodial Roth IRAsIndividual Retirement Account (IRA)A personal retirement savings account with tax advantages. Two main types: Traditional (tax now, pay later) and Roth (pay now, tax-free forever).Full definition for working teens, and how to teach financial literacy before it matters. Here is what each account does and what to open first.
US-only. UTMA/UGMA, custodial Roth IRAs, and 529 plans are US-specific account structures. Other countries have similar concepts (Canada has RESP, the UK has Junior ISAIndividual Savings Account (ISA)A UK tax-advantaged account where contributions are post-tax but all growth and withdrawals are tax-free.Full definition) with different rules.
UTMA/UGMA custodial accounts let you invest in a child's name, but at age of majority (18-21 depending on state) the money is theirs to spend however. A custodial Roth IRA, opened only when the child has earned income, is the most powerful financial head-start you can give: $3,000 contributed at 15 grows tax-free for 50 years to roughly $88,000 at 7%. For pure college funding, a 529 has better tax treatment.
Section 1 · Custodial accounts (UTMA/UGMA)
A custodial account is an investment account opened in a child's name and managed by a parent or guardian until the child reaches the age of majority (18 to 21 depending on state).
- 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.
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 ↗IRS 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.
- Kiddie-tax rules: in 2026, a child's unearned income above approximately $2,700 is taxed at the parent's rate. Verify the threshold each year.
The critical catch
When the child reaches the age of majority, the account becomes theirs with no strings. An 18-year-old 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.
Section 2 · Custodial Roth IRA
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.
The requirement: the child must have earned income (wages, self-employment) to contribute. The annual contribution is limited to the lesser of $7,500 (2026 IRA limit) or the child's actual earned income.
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.
$3,000 contributed at age 15 at 7% annual growth for 50 years (to age 65) becomes approximately $88,000, completely tax-free. 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.
This is the most powerful financial head-start you can give a working child. Where to open: Fidelity and Vanguard both offer custodial Roth IRAs with no minimum balance.
Section 3 · Teaching money basics
The goal is not to create a financial analyst. It 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.
- IRS. Frequently Asked Questions on Gift Taxes · irs.gov/gift-taxes-faq.
- IRS Topic 553. Tax on a Child's Investment and Other Unearned Income (Kiddie Tax) · irs.gov/taxtopics/tc553.
- Fidelity Custodial Roth IRA · fidelity.com/retirement-ira/roth-ira-kids.