Schwab outlines a Roth IRA blueprint worth over $700K
Parents weighing tax-advantaged savings vehicles for their children are increasingly comparing newly launched Trump Accounts against custodial Roth IRAs, a vehicle that has been available for decades.
Charles Schwab published a modeling exercise showing how a custodial Roth IRA, funded with a teenager's summer earnings, can generate a six-figure retirement advantage over an adult who waits until age 30 to start saving.
With Trump Accounts set to begin accepting private contributions on July 4, 2026, families are re-evaluating every option for building a child's financial foundation, and Schwab's analysis arrives at a moment when the comparison is impossible to ignore.
Schwab's Roth IRA model turns $115,000 into more than $707,000
In a hypothetical scenario published on its education platform, Schwab modeled a teenager who begins contributing $2,300 per year to a custodial Roth IRA at age 15 and continues through age 65.
Assuming a 6% average annual return over those 50 years, the account grows to more than $707,000 on just $115,000 in total contributions. The Schwab Center for Financial Research laid out the scenario in a Schwab education article.
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An adult who delays saving until age 30 faces a sharply different equation under the same 6% growth assumption over the remaining 35 years to retirement.
That late starter would need to set aside approximately $6,000 annually and contribute $210,000 in total to match the same ending balance, the firm calculated. The gap is $95,000 in additional out-of-pocket savings, driven entirely by 15 lost years of compounding.
How custodial Roth IRAs work and who qualifies
A custodial Roth IRA is an account that a parent or guardian opens on behalf of a minor who earns income, and the child remains the beneficial owner of the assets.
The contribution limit for 2025 is $7,000, or the child's total earned income for the year, whichever is less, according to the IRS, and that ceiling rises to $7,500 for the 2026 tax year.
Eligible income includes wages reported on a W-2 and self-employment earnings from jobs like babysitting or lawn care, Fidelity Investments noted in its Roth IRA for Kids guide.
The parent manages the account until the child reaches the age of majority, typically 18 or 21, depending on the state. A parent or grandparent can fund the full contribution on the child's behalf, provided the child has earned at least that amount.
The tax advantage teenagers hold over adult savers
The tax math behind a teenager's Roth IRA contributions rarely works this favorably at any other stage of life, Schwab noted.
Roth IRA contributions are made with after-tax dollars, but a teenager earning summer income will almost certainly fall below the standard deduction threshold of $15,750 for single filers in the 2025 tax year, Schwab noted. That means the teen may owe zero federal income tax on those earnings.
Timothy McGrath, a certified financial planner and managing partner at Riverpoint Wealth Management, told CNN that the first question parents should answer is what the money is actually for.
My concern is people are going to be so excited about (the) $1,000, they might use that when it might not be the best vehicle for them or their children on a long-term basis
That means the teen may owe zero federal income tax on those earnings, and every dollar deposited grows tax-free in the account for decades.
Custodial Roth IRAs carry a hidden financial aid advantage
Families concerned about the potential impact on college financial aid may want to understand how custodial Roth IRAs are treated differently.
Retirement accounts are not reported on the Free Application for Federal Student Aid, which means balances in a custodial Roth IRA do not count against eligibility for need-based grants, Schwab confirmed.
That sets the custodial Roth IRA apart from custodial brokerage accounts opened under the Uniform Gifts to Minors Act, which are assessed at a rate of up to 20% in federal aid formulas, Fidelity noted.
A distribution taken from the account before retirement, however, would need to be reported as income on a future FAFSA filing and could reduce aid eligibility, the firm warned.
Custodial Roth IRAs in the era of Trump Accounts
The launch of Trump Accounts has prompted families to compare every tax-advantaged vehicle available to minors, and financial planners are urging parents to clarify their goals before making a choice.
"Compounding growth is a miracle in and of itself. But you've got to start early," Howard Davidoff, a professor at the Murray Koppelman School of Business at Brooklyn College, told CNN.
He added that a custodial Roth IRA can offer greater long-term benefits than a Trump Account for children with earned income, because it delivers tax-free income growth for life.
Schwab's modeling exercise illustrates one of the structural differences between custodial Roth IRAs and other children's savings vehicles: tax-free growth and no required minimum distributions on the original owner, compounded over a horizon that begins in a teenager's working years.
Related: Charles Schwab, Vanguard: A costly cash choice on 401(k)s, IRAs
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This story was originally published July 1, 2026 at 9:03 AM.