Individual Retirement Accounts

As an adult, thinking about saving for our eventual retirement is daunting, but necessary. We open 401K or other pension plans through our employers and contribute a percentage of our income to them each year in hopes that they will continue to grow for us until we need it later on in life. Many of us do not even open one of these accounts until we have reached adulthood; however, what most people do not know is that if your child has any kind of earned active income, you can help your child kickstart their retirement early on by opening an individual retirement account for them. 

An individual retirement account, commonly referred to as an “IRA”, is a tax-advantaged investment account that individuals use to save for retirement on their own, independent of any employer. There are two types of IRA accounts, traditional IRAs and Roth IRAs, each of which has its own characteristics and benefits. 

In this post, I’ll walk through the specific attributes of each of these accounts, the pros and cons of setting up these accounts for your children, the requirements and contribution limits for these accounts and perform a comparison of the two accounts so that you have the information needed to make an informed decision. 

FAQ #1: What are the two types of IRAs? 

Traditional IRA - A tax-advantaged personal savings plan whereby contributions to the account may be tax deductible. 

Roth IRA - A tax-advantaged personal savings plan where contributions are not tax deductible, but qualified distributions from the account may be tax free. 

FAQ #2: How do these two accounts compare? 

Attribute	Traditional IRA	Roth IRA
Contributions* to the account are deductible for federal income tax purposes	✅	❌
Distributions from the account are not taxed	❌	✅
Contribute up to $7,500 in 2026 tax year**	✅	✅
Anyone with earned income can contribute***	✅	❌
Subject to 10% penalty for early or non-qualified withdrawals	✅	✅
Required to take distributions from the account at a specified age	✅	❌
Account can be inherited	✅	✅

*Contributions could be deductible against your taxable income up to a certain limit. Refer to FAQ #4.

**Contributions to an IRA in a given year can’t exceed an individual's total taxable compensation for that year. Refer to FAQ #4. 

***If you exceed certain income thresholds, you may not contribute to a Roth IRA. Refer to FAQ #8.

FAQ #3: Are you required to earn income in order to contribute to an IRA?  

Yes, to contribute to either a traditional or a Roth IRA, your child must have taxable compensation. The IRS defines this as earnings from the following: 

1. Wages, salaries, tips, professional fees, bonuses 

2. Other amounts received for providing personal services 

3. Commissions

4. Self-employment income

5. Alimony 

6. Nontaxable combat pay

7. Taxable non-tuition fellowship and stipend payments (for graduate studies) 

This one can be tricky for younger children who may be too young for a job. Interest and dividend income from investments or earnings from rental properties are classified as passive income and therefore these forms of income do not qualify, so if you own a rental property that is generating income, putting that property and the respective earnings into your child’s name will not benefit them for these purposes. 

However, for a child that has an after school tutoring or babysitting gig or a summer job mowing lawns or working on your neighbor’s pool, this qualifies as active earned income and can be tracked for purposes of determining how much your child is allowed to contribute to an IRA in that tax year. Refer to the examples section of this post for more detail.

Although not as easy, it is possible for younger children to have qualifying active earned income as well. I have provided a few examples of where this could be possible for a family in the examples section at the bottom of this post as well. 

FAQ #4: What is the tax deduction for contributing to a traditional IRA? 

The maximum amount that can be contributed to a traditional or Roth IRA account in 2026 is the same, $7,500. This amount is higher for those over 50 (refer to IRS website). However, just because the maximum contribution is $7,500, that does not mean that you can contribute the entire amount. Your child’s earned income in the tax year is the limit. 

For example, if your son makes $6,000 in 2026 tutoring, he can only contribute up to $6,000 into his traditional IRA for the 2026 tax year. This $6,000 is also that amount that qualifies as tax deductible. Therefore, he is paying zero in federal taxes on that earned income and now has put that money into a retirement account that will continue to grow for him for years to come. 

FAQ #5: What are common exceptions to the 10% early withdrawal penalty? 

1. You are aged 59 ½ or older

2. You become permanently disabled as defined by the IRS

3. Upon death, withdrawals can be made to your estate or beneficiaries 

4. Qualified medical expenses as defined by the IRS

5. Health insurance premiums while unemployed

6. Qualified higher education costs

7. First-time homebuyer exception

8. Qualified charitable distributions

9. Special exceptions for disaster recovery

A complete list with explanations of each of these examples can be found on the IRS website: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions

It is important to note, however, that withdrawals from a Roth IRA also require that the account has been open for at least 5 years. The clock starts on January 1 of the tax year for which you made your first Roth IRA contribution. 

FAQ #6: What are the penalties owed for withdrawals from an IRA prematurely? 

There is a 10% early withdrawal penalty that must be paid on top of any taxes owed on a withdrawal from a traditional IRA. 

For a Roth IRA, you can withdraw your original Roth IRA contributions at any time, for any reason, without paying taxes or penalties because those contributions were made with after-tax dollars. Investment earnings are different. If you withdraw earnings before age 59½ and before the account has met the requirements for a qualified distribution, the earnings may be subject to ordinary income tax and a 10% early withdrawal penalty unless an IRS exception applies.

FAQ #7: When are you required to start taking money from an IRA? 

Traditional - Required minimum distributions start in the year you turn 73. 

Roth - Not applicable. Money can continue to sit in the account as long as you live. 

FAQ #8: What are the income limits for being able to contribute to a Roth IRA? 

Your child’s ability to contribute to a Roth IRA does depend on their income in a tax year. Because earnings from the stock market in Roth accounts grow tax free, there are income limits placed by the IRS to prevent extremely wealthy people from putting loads of money into these accounts only to not pay tax on them later on in life. There are ways around this for high-net worth individuals, but that is a topic for another day and not super relevant to the income your child is earning from their babysitting job. 

For 2026, single filers must have a modified adjusted gross income below $153,000. This income likely will not be triggered for your teenage kids, which is why opening a Roth IRA at a young age can be so beneficial. Those earnings will grow over many years and once your child reaches 59 ½ they can start to take distributions from the account and not pay tax on them. 

Examples

Now that I’ve run through the basics of each account, let’s take a look at a few practical examples of how each of these accounts can possibly benefit your child at different stages of their life. 

Example 1: 

Your 15 year old son mows lawns for your neighbors during the year. In doing so, he earns $8,000 during 2026. $8,000 represents his total taxable income for the year. Your family lives in Texas so he does not owe any state income tax on those earnings, nor does he have to complete a state tax return. However, he is required to file a federal tax return for 2026. He will file his return as single and because his total gross income does not exceed the standard deduction for 2026 for a single filer of $16,100, he will not owe any federal tax on this $8,000 in earnings, but he will owe a small amount in taxes for social security and medicare on these earnings. 

You open a Roth IRA on your son’s behalf in 2026. You allow him to keep his hard earned money post federal taxes and put it into his high yield savings account. You gift your son $7,500 in 2026 on top of the money he has earned for the year, but this $7,500 does not qualify as income that he must report on his tax return. You do not have to report the $7,500 as a gift to pay gift tax on either because it is below the gift tax limits. The full $7,500 that you gift can go into your son’s Roth IRA because he had earned income of $8,000 during the year. 

Your son now has $7,500 in his Roth IRA. You research the funds that his Roth IRA are invested in and note that the average returns are 10%. In 45 years, your son will be 60 and will have roughly $546K in 45 years if the original $7,500 investment remains the same and grows at a 10% rate of return over the next 45 years. Your son can use this money in retirement and not pay tax at the time he takes it out of the Roth IRA so long as he is over the age of 59 ½. 

Example 2: 

Your daughter is fresh out of college and working her first adult job as an IT specialist. She has a Roth IRA that you opened on her behalf when she was in middle school when she was working at the concessions stand at the local baseball park. This account currently holds $15,000 in it. 

Her starting salary for her job is $90,000. Her employer offers a 401K program that she enrolls in and the company automatically contributes 2% of her salary to the account each year. She maxes out her 401K contributions in 2026 totaling $24,500. Because she is living at home to save some money, she has the ability to put away more of her income in 2026. Therefore, on top of this $24,500 she has already contributed to her company 401K, she decides to contribute another $7,500 to her Roth IRA in the same tax year. 

At the end of 2026, she now has $26,300 in her traditional employer sponsored 401K and $22,500 in her Roth IRA. The $24,500 she contributed to her 401K in 2026 reduces her taxable income for the year. She will have to pay taxes on this in the future at retirement when she pulls money from the 401K account. However, the Roth IRA account will continue to grow tax-free for her for the rest of her life. The $7,500 she contributed in 2026 is not a tax deduction for her, but she will benefit from it in the long-run when she pulls from the account at retirement. 

Example 3: 

Assume the same fact pattern as example 2 above, however, your daughter is now a few years out of college, has gotten a promotion and she is now making $160,000 per year. Her income is now high enough that she may no longer be eligible to contribute to a Roth IRA. However, she still wants to maximize her retirement savings and therefore she continues to max out her annual 401K contributions and decides to open a traditional IRA and contribute $7,500 to it. Because she is covered by her employer 401K plan, she is not able to use that $7,500 contribution to reduce her taxable income, but unlike a Roth IRA, there are no income limits in place to contribute to a traditional IRA. 

Example 4: 

You and your spouse own and operate a clothing store. You sell children’s toys and clothes. You have two children ages 1 and 4 and you employ your children to model the clothing for the semi-annual advertisements that you send out to promote your store. You pay each of your children $5,000 for their modeling services in 2026. This qualifies as earned active income for your children and therefore this money is eligible to be placed into either a traditional or a Roth IRA up to the $7,500 limit. 

Resources:

More Information:

1. IRS Website - https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras

2. Nerdwallet: Finding the Best IRA Accounts for 2026 - https://www.nerdwallet.com/retirement/best/ira-accounts

3. Vanguard Information on IRAs- https://investor.vanguard.com/accounts-plans/iras?cmpgn=PIM:PS:XX:IRA:20251015:GG:CROSS:LB~PIM_VN~GG_KC~NB_PR~SD_UN~IRA_MT~PMAX_AT~None_EX~None:None:NONE:NONE:KW:NB_IRA&gclsrc=aw.ds&gad_source=1&gad_campaignid=23842073993&gbraid=0AAAAAD1csJAgdM_Hu8APZQ_mg2CcAVH0H&gclid=Cj0KCQjwjvfSBhDpARIsAEiOpSvxvbsU-1v9QqFSN_p5_o9W9Ux3VsP23VO1Tv1kZiCepBoeDHrdL6caAqdLEALw_wcB

To Open an IRA:

1. Vanguard - https://investor.vanguard.com/accounts-plans/iras?cmpgn=PIM:PS:XX:IRA:20250127:GG:CROSS:LB~PIM_VN~GG_KC~BD_PR~SD_UN~IRA_MT~Exact_AT~None_EX~None:CONV:NONE:NONE:KW:BD_OpenIRA&gclsrc=aw.ds&gad_source=1&gad_campaignid=13905381317&gbraid=0AAAAAD1csJDFpNQQP7WnH_ByZBP5_IGNz&gclid=Cj0KCQjwjvfSBhDpARIsAEiOpSvyQ4GFY-9TXvuNqXqYyJws8BMN4ob53bd4eXvw39BJkATR_EYsXhUaArInEALw_wcB

2. Fidelity - https://www.fidelity.com/retirement/roth-ira?imm_pid=169651402768&immid=100724_SEA&imm_eid=ep23570363222&utm_source=GOOGLE&utm_medium=paid_search&utm_account_id=1869877802&utm_campaign=RET&utm_content=169651402768&utm_term=open%20roth%20ira%20fidelity&utm_campaign_id=100724&utm_id=21412718052&gclsrc=aw.ds&audience=kwd-23570363222&gad_source=1&gad_campaignid=21412718052&gbraid=0AAAAAD7OUhJnBtkt3QS8mwfDusvD94UTB&gclid=Cj0KCQjwjvfSBhDpARIsAEiOpStdryRkAtJvqA7vUbVtAGWl0LVQdsWbCqW51Gqiu7BgKhzZO5m9528aAktgEALw_wcB

3. Robinhood - https://robinhood.com/us/en/support/articles/ira-overview/