As Benjamin Franklin famously noted, “Lost time is never found again.” Indeed, time is the most precious resource that any of us have, and each passing moment provides an opportunity to set ourselves up for success.
With time on their side, children have the greatest advantage, especially when considering the role of time in compounding and growth. Early saving and investing can give children the building blocks for a prosperous future.
Roth Retirement Accounts for Children
Starting a Roth IRA for a child or grandchild can be a valuable way to harness the gift of time and simultaneously help the next generation build a solid financial foundation—and not just for retirement.
First, some basics. In order to contribute to an individual retirement account of any type, an individual must have earned income. That can include money from babysitting, a paper route, a summer job, or even from filing paperwork or sweeping out the offices for a family business, as long as the pay is reasonable and commensurate with the work performed. In 2026, persons age 50 and under can contribute up to 100% of earned income or $7,500, whichever is less. Funds deposited can then be invested in a variety of asset classes, including stocks, fixed-income investments, and cash/equivalents.
There are two main types of IRAs: traditional and Roth. The principal difference is when the money in the accounts is taxed. Contributions to traditional IRAs reduce taxable income at the time of the deposits (pre-tax contributions), and the funds grow inside the account without taxation. When funds are withdrawn, however, they are taxed as ordinary income. With a Roth IRA, by contrast, taxes are paid on the deposited funds (after-tax contributions). Once in the account, they grow tax-free and are not taxable as ordinary income when withdrawn.
Another difference between traditional and Roth IRAs concerns when funds must be withdrawn. Traditional IRAs are subject to Required Minimum Distributions (RMDs). RMDs dictate that a percentage of the IRA must be withdrawn each year once the account owner reaches a certain age (as it stands now this is age 73 or 75, depending on the account owner’s birth year). In contrast, there are no RMDs on Roth accounts. Funds can be left in the account to grow tax-free for as long as the owner wishes.
A principal advantage of the Roth IRA for children is tax-efficiency. Especially when they are younger, most children will not earn enough income to subject them to income tax liability. In 2026, for example, those earning less than the standard deduction amount of $16,100 will typically owe no income tax. However, they may still deposit earned income in the account, subject to the annual contribution limit, and enjoy both tax-free growth and, potentially, tax-free withdrawals in retirement. Thus, the Roth IRA can provide an opportunity for a young person to begin building a nest egg that has maximum time to grow and potentially pay no taxes on withdrawals in retirement.
Roth IRAs and Flexibility
Another feature of Roth IRAs for younger individuals is their flexibility. Usually, earnings withdrawn from a Roth IRA prior to age 59 ½ are subject to a 10% tax penalty in addition to being taxed as ordinary income. But there are several exceptions to this rule, including two that can be especially beneficial for young people.
First-time homebuyers may withdraw up to $10,000 in earnings from a Roth IRA without incurring taxes or penalties, as long as the Roth account is at least five years old.
Earnings may be withdrawn penalty- and tax-free to cover qualified higher education expenses, as long as the Roth account is at least five years old.
In this connection, it’s important to make a distinction between contributions to a Roth IRA and earnings in a Roth IRA. Because Roth contributions are made with after-tax dollars, your contributions to a Roth IRA may generally be withdrawn at any time with no tax or penalty consequences. However, the earnings gained on the contributions will incur penalties if withdrawn prior to the owner’s age 59 ½ unless they meet one of the special circumstances mentioned above.
The Magic of Time and Compounding
To illustrate the advantages conferred by extra time for compounding, consider a child, age 10, who earns $3,000 per year by doing simple chores in a parent’s place of business. Because their income is well below the standard deduction limit, they are not required to file a tax return. Suppose that they deposit just $2,500 per year into a Roth IRA for eight years (until high school graduation). Assuming a long-term average growth rate of 10% and no additional deposits, the $20,000 deposited into the account over those 8 years would grow tax-free, reaching approximately the following levels in future years:
Age 40: $235,000
Age 50: $605,000
Age 65: $2,520,000
At JFS Wealth Advisors, we understand the importance of time and making sure your money is working hard for you and your family. If you have questions about education funding or any other important financial matter, let us help you find the answers you need.
