There are two kinds of IRAs that your teen can choose from, Roth IRAs and traditional IRAs. The table below shows why starting early can make a big difference. Your teen must have earned income. Income or dividends from investments are not considered earned income. Your teen must file an income tax return and report his or her earnings, even if no tax is owed.
Earned income includes wages, salaries, commissions, and self-employment income.
This may come from domestic work, such as mowing the lawn or any job that you'd hire an outsider to do, provided that your teen keeps good records and receives a reasonable wage. Records should indicate the type of work performed, the number of hours worked, and the amount earned. Regardless of the amount of the contribution, he or she should understand that the money must remain untouched to give it time to grow. Children's IRAs are established as custodial accounts. Colleges generally consider a smaller percentage of parents' assets in the financial aid equation.