Your Kid’s Summer Job Is a Tax Loophole You’re Not Using
Your 15-year-old mowed lawns all summer and made $1,800. You’re proud, you Venmo’d them for gas money, and then it never occurred to you that this was also a retirement-planning opportunity. It is. A minor with earned income can have a Roth IRA, and the money you’d otherwise spend on a bigger allowance can go into that account instead while your kid keeps every dollar they earned.
Most parents don’t do this because nobody tells them it’s an option. The custodial Roth IRA is one of the highest-leverage moves in personal finance and almost nobody under 25 has one, because almost nobody under 45 knows to set it up for them.
What Counts as Earned Income (and What Doesn’t)
The IRS requires earned income to contribute to any IRA, custodial or not. For a kid, that means money paid for actual work:
- Mowing lawns, shoveling snow, babysitting, tutoring
- A part-time job with a W-2 (retail, food service, camp counselor)
- 1099 work: dog walking, social media help for a neighbor’s small business, freelance anything
- Wages from a family business, as long as the pay is reasonable for the work done
What does not count:
- Allowance for chores around the house
- Birthday money, graduation checks, gifts from grandma
- Investment income (dividends, interest, capital gains from an existing account)
The line matters because the IRS can and does ask for proof if a return gets questioned. “My kid definitely worked” isn’t documentation. Real dates, real amounts, and a plausible pay rate are.
The Contribution Cap: Lesser of Two Numbers
You can contribute up to the lesser of the child’s total earned income for the year or the annual IRA contribution limit set by the IRS. If your kid earned $1,800 mowing lawns, the cap is $1,800, not the full IRA limit, because you can never contribute more than the kid actually earned. If your kid had a real summer job and earned more than the annual IRA limit, the cap is the IRA limit itself.
Check the current annual IRA contribution limit before you file; it adjusts for inflation most years and changing the number here would just make this article wrong in twelve months.
The Move Almost Nobody Uses: Parents Fund It, Kid Keeps the Cash
The contribution doesn’t have to come out of the money your kid earned, and that changes the math entirely. A parent, grandparent, or anyone else can gift cash to the child, and that gifted cash can go into the Roth IRA, as long as the total contribution doesn’t exceed what the child earned that year.
So the actual play looks like this: your kid earns $1,800 babysitting over the summer, spends it on video games and movie tickets like a normal teenager, and you separately write a $1,800 check into their custodial Roth IRA. The earned-income requirement is satisfied because the kid earned that amount doing real work. The contribution itself comes from you. Your kid never feels the money leave their pocket, and the account still gets funded to the max their earnings allow.
This is legal, it’s the same principle grandparents use to fund a grandchild’s 529 plan, and it’s the single biggest lever in this whole strategy. Most people who’ve heard of custodial Roth IRAs assume the kid has to sacrifice their actual earnings to make it work. They don’t.
Why Roth, Not Traditional
A Traditional IRA contribution gets you a tax deduction against your income in the year you contribute. For an adult in the 24% bracket, that deduction is worth real money. For a 15-year-old who earned $1,800 for the whole year, the deduction is worth almost nothing: their income is already below the standard deduction, so they’re paying $0 or close to it in federal income tax regardless. A deduction against a tax bill that’s already zero saves you nothing.
Roth is the correct call here because the kid is trading a tax break they don’t need (the deduction) for one they’ll desperately want in fifty years (tax-free growth and tax-free withdrawals in retirement). Money that goes in now, while your kid is in the 0% to 10% bracket, and comes out decades later completely tax-free, is about as clean a tax arbitrage as the code allows.
The Math That Makes This Worth Doing
Let’s run real numbers. Assume a parent funds $2,000 a year into a custodial Roth IRA for four years, ages 14 through 17, while the kid keeps their actual lawn-mowing and babysitting earnings. Total contributed: $8,000. The money is invested in a total-market index fund and left alone until age 65, averaging 7% a year (a reasonable long-run assumption for stocks, not a promise).
Here’s what each year’s contribution grows to by age 65:
| Contribution age | Amount | Years growing | Value at 65 |
|---|---|---|---|
| 14 | $2,000 | 51 | $63,038 |
| 15 | $2,000 | 50 | $58,914 |
| 16 | $2,000 | 49 | $55,060 |
| 17 | $2,000 | 48 | $51,458 |
| Total | $8,000 | $228,470 |
Eight thousand dollars, contributed before your kid could legally drive in most states, turns into roughly $228,000 by retirement age, and every cent of that is tax-free on the way out. Nobody’s 401k contribution in their 30s does that. The entire trick is time: money that compounds for 48 to 51 years does something money that compounds for 25 years simply cannot.
Compare that to doing nothing: that same $8,000, if it never gets invested and just sits in a savings account earning close to nothing, is still $8,000 (less, after inflation) fifty years later. The gap between those two outcomes is the whole argument for setting this account up this summer instead of “eventually.”
Recordkeeping: What Actually Matters
If your kid’s income is from self-employment (mowing lawns, babysitting, tutoring, anything without a W-2), keep a simple log. This is what would actually hold up if the IRS ever asked:
- Date of each job
- Hours worked
- Rate charged (per hour or per job)
- Total amount paid, and who paid it
A notes app or a spreadsheet is fine. You don’t need an accountant for $1,800 of babysitting income, but you do need something better than “trust me.” If the family business pays your kid, keep the same records and make sure the pay rate is one you could defend to a stranger, not an inflated number designed to max out the contribution.
The Custodial Part: Be Honest About the Risk
A custodial Roth IRA (opened under UTMA or UGMA rules, depending on the brokerage and state) is legally the child’s account from day one. You, the parent, are the custodian, meaning you control it and make investment decisions, but you cannot use the money for your own expenses and you cannot take it back.
Control transfers to the kid at the age of majority, which is 18 in most states and 21 in a handful of others. At that point, it is entirely their money. They can leave it invested for retirement, or they can log in and withdraw every dollar of contributions to buy a car, a trip, or anything else they want.
Don’t tell yourself a story about how this teaches financial responsibility and they’ll obviously leave it alone. Maybe they will. Plenty of 18-year-olds, handed a $30,000 account, empty it. That’s a real risk, not a hypothetical one, and it’s the actual tradeoff you’re making by putting this money in the kid’s name instead of your own account. If you’re not comfortable with the possibility that your kid drains the account at 18, this strategy isn’t for you, no matter how good the compound growth math looks.
Financial Aid: Retirement Accounts vs. UTMA
Retirement accounts, including a custodial Roth IRA, are not counted as assets on the FAFSA. That’s a real advantage over a plain custodial brokerage account (a UTMA), which is counted as the student’s asset and assessed at a much higher rate than parental assets, up to 20% versus roughly 5.6% for parent-owned assets.
Be accurate about the other side of this, though: while the Roth IRA balance itself isn’t reported as an asset, any distribution taken from it during the “base year” (roughly the prior-prior tax year for FAFSA purposes) counts as untaxed income to the student, which can hurt aid eligibility more than an asset would. In practice this rarely matters for a $3,000 to $10,000 custodial Roth, because nobody’s taking distributions from it during high school. It matters more for families actively juggling financial aid strategy with a bigger account.
The short version: a custodial Roth IRA is friendlier to financial aid than a UTMA account holding the same dollar amount, as long as you’re not pulling distributions out during the years FAFSA looks at.
You Can Take Contributions Back Out, Anytime
One more feature worth knowing: Roth IRA rules let you withdraw your contributions (not earnings) at any time, for any reason, with no tax and no penalty. This isn’t the emergency fund you want to touch, since every dollar pulled out is a dollar that stops compounding for the next 50 years, but it means the money isn’t fully locked up in the way an emergency makes it sound. If your kid needs $1,000 of the $8,000 they put in five years ago for something urgent, they can take it out without the IRS taking a cut.
Earnings are a different story: those are subject to the usual Roth rules (generally locked in until 59.5, with some exceptions) and pulling them out early triggers tax and a 10% penalty. Know the difference between “my contributions” and “the growth on my contributions” before anyone touches this account.
What to Actually Buy Inside It
Don’t overthink a $3,000 account. One broad total-market index fund (a total U.S. stock market fund or an S&P 500 fund, whichever your brokerage offers with the lowest expense ratio) is the entire portfolio. No target-date fund, no picking five different sector ETFs, no bonds. A 15-year-old’s Roth IRA has a 50-year time horizon; it should be 100% stocks in the most boring, diversified fund available, and it should stay that way for a very long time.
The account is small enough that fees matter more than fund selection nuance. Pick the fund with the lowest expense ratio that tracks the broad market, set it, and don’t touch it again until your kid is old enough to make that decision themselves.
The Bottom Line
Your kid’s summer job is worth more than the cash in their pocket. Track their earned income, fund a custodial Roth IRA up to that amount (using your own cash if you want them to keep their actual earnings), put it in one index fund, and leave it alone. Eight thousand dollars contributed across four teenage summers can turn into over $200,000 by retirement, tax-free, and it costs you the same money you were probably going to spend on them anyway.
The catch is real and worth saying plainly: at 18 or 21, it’s their account and their choice. That’s the deal. Fund it anyway.
