Helping children build wealth of their own: why the Roth IRA is an important gifting vehicle.

When it comes to gifting to children, especially teenagers, we often think of material items or memorable experiences. While those are meaningful, one of the most powerful and often overlooked gifts is helping them begin building wealth for themselves, particularly through one important tool: the Roth IRA.

Roth IRAs offer a powerful opportunity for savers to pay income tax on contributions now while avoiding income and capital gains taxes on those assets in the future. Funded with after-tax dollars, Roth IRA contributions grow tax-free and can be withdrawn tax-free once the account holder reaches age 59½. (Withdrawals made before this age may be subject to taxes and penalties.)

Because this tax structure is so advantageous, the IRS restricts who can contribute to Roth IRAs based on modified adjusted gross income (MAGI). As income increases, contribution limits are reduced—and eventually eliminated. In 2025, the phase-out begins at $150,000 for single filers and $236,000 for married couples filing jointly.

To contribute to a Roth IRA, the individual must have earned income—wages or salary—but the IRS does not require that the earned income be the actual source of the contribution. This creates an excellent planning opportunity for parents and grandparents. When a child earns their first paycheck, a contribution to a Roth IRA in the child’s name—funded by a loved one—can be one of the most impactful and tax-efficient gifts they can receive.

Let’s take a quick look at two examples:

Sophie gets her first job at age 15, earning $7,000 in a year by babysitting. Her parents decide to contribute $7,000—the 2025 maximum Roth IRA contribution—on her behalf and never add to the account again.

Assuming Sophie’s parents are at a combined 30% federal and state marginal tax bracket, they would have had to earn $10,000 to arrive at the net $7,000 they contributed: thus the true “tax cost” of the gift is $3,000—the income tax paid on that $10,000.

If the investments in Sophie’s Roth IRA earn an average of 7% annually, the account would grow to over $206,000 by the time she turns 65—and she’ll owe $0 in taxes on the withdrawals!

This simple, one-time gift becomes a lifelong, tax-free asset—an incredibly powerful head start on building wealth. Imagine if Sophie’s parents continued to contribute over multiple years!

Now consider Jackson, who earns the same income as Sophie but whose parents choose to contribute $7,000 to a traditional IRA on his behalf instead of a Roth IRA. Like the Roth, that $7,000 would grow to over $206,000 by the time he turns 65 if it earns a 7% annual return. However, unlike the Roth, Jackson would owe income tax on every dollar he withdraws from the account.

Assuming a future marginal tax rate of 30%, Jackson would lose around $61,800 to taxes upon withdrawal—shrinking his net retirement benefit to roughly $144,200.

He’d also face required minimum distributions (RMDs) beginning at age 75, whether he needs the money or not—something Roth IRAs do not impose on original owners.

Now, it’s true that Jackson would receive a $7,000 tax deduction in the year the contribution is made. But for most teenagers, that deduction is of limited value. In 2025, the standard deduction for single filers is $15,000, meaning most teens won’t have enough income to owe federal income tax at all. Even if Jackson earns enough to be taxed, he’d likely fall into the 10% or 12% federal tax bracket, meaning the deduction might save him at most $700 to $840 in taxes now—a small short-term benefit compared to the tens of thousands he’d eventually owe in retirement.

In short, while both traditional and Roth IRAs offer long-term growth, the Roth IRA provides a significantly better lifetime tax advantage for most young earners.

As a parent, the decision is often less about choosing the “perfect” account and more about simply getting started—and this can be a great way to begin, especially if you weren’t aware of this powerful and deeply rewarding aspect of financial planning. Contributing to a Roth IRA for your child is not just a financial gift; it’s a teaching moment that can help lay the foundation for lifelong financial literacy.

One way to make this more engaging is to involve your child in the process. For example, you might propose that they contribute the first $1,000 from their earnings, and you match the rest to reach the annual contribution limit. The amounts can vary, but what matters most is building the habit—the financial muscle—of saving for the future. This approach mirrors the concept of a 401(k) employer match and reinforces the value of saving.

It also introduces the critical concept of compound interest. The earlier a person starts saving, the more time their money has to grow, and the more powerful that compounding becomes over decades. While kids have a long runway until retirement, their earned income often gets funneled toward immediate wants—like the latest tech or fashion. With a parent’s guidance and support, this can become a meaningful opportunity to shift their mindset and create a lasting learning experience for everyone involved.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®. CERTIFIED FINANCIAL PLANNER™ and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.