Encourage Your Child to Fund an IRA

Looking for a lasting gift for your children or grandchildren? Once they start working, teach them good savings habits by encouraging them to fund an individual retirement account (IRA). Even if your child only contributes for a few years, this can be a significant help for retirement.

For example, assume your 16-year-old son starts working part-time and earns more than the maximum IRA contribution each year. The maximum limit is $7,500 for 2026 (up from $7,000 for 2025). A child must have earned income to contribute to an IRA and may only contribute the lesser of earned income or the maximum IRA contribution.)

If your son contributes the maximum IRA contribution from ages 16 to 22, he will contribute $52,500 over seven years. With no further contributions, those contributions could grow to over a million dollars on a tax-deferred or tax-free basis by age 65. That assumes earnings of 8% compounded annually but doesn't include the payment of any income taxes that might be due. (This example is provided for illustrative purposes only and isn't intended to project the performance of a specific investment vehicle.)

Although most children will be eligible to contribute to both a traditional deductible IRA and a Roth IRA if they have earned income, you should probably encourage your child to fund a Roth IRA. A Roth IRA has several advantages:

• Roth IRAs are more flexible. Your child can withdraw all or part of his or her contributions at any time, without paying federal income taxes or penalties. Thus, if your child later decides to use contributions for college, a car, a down payment on a home, or some other need, contributions can be withdrawn with no tax consequences.
• Earnings accumulate tax-free, plus qualified distributions can be withdrawn tax-free. A qualified distribution is one made at least five years after the first contribution and after age 59 1/2. There are also certain circumstances where earnings can be withdrawn without paying income taxes and/or the 10% federal income tax penalty. If your child allows the funds to grow until at least age 59 1/2, all contributions and earnings can be withdrawn without paying any federal income taxes.
• A traditional deductible IRA offers little tax benefit to a child. When your child first starts working, he or she will typically pay a low marginal tax rate on their low income. So even though the Roth IRA contribution isn't tax-deductible, your child typically receives little or no tax benefit from deducting the traditional IRA contribution anyway.