How a Roth IRA can give your adult children and grandchildren a running start

Summary

• One of the best ways to offer adult children financial help may be the most overlooked—setting up and contributing to a Roth IRA on their behalf.
• Roth IRAs offer flexibility and tax advantages: Contributions can be withdrawn penalty-free for emergencies, while earnings grow tax-free and can be withdrawn tax-free in retirement or partially for first-time home purchases.
• Parents and grandparents can fund Roth IRA contributions up to $7,000 annually (2025 limit) for adult children who have earned income, providing a powerful way to help young adults build savings while teaching financial responsibility.

A more impactful financial gift: A Roth IRA

Even after kids leave home, The Bank of Mom and Dad stays open. Sometimes it’s help with a plane ticket. Other times, it’s money for a down payment. And how many empty nesters worry they’ll never stop paying for twentysomethings’ streaming services and cellphones? According to one report, parents spend $500 billion annually to support their adult children.¹

But as much as they may appreciate you paying for Netflix, the best way to offer adult children financial help may be the most overlooked—setting up and contributing to a Roth IRA. A Roth IRA can help new college grads when they’re scraping by on entry-level salaries—a tough time to put away money for retirement. It can also help take the pressure off parents who now need to balance retirement planning with competing financial demands.

What is a Roth IRA?

Unlike a traditional IRA, Roth IRAs don’t come with an immediate tax break for your contributions, but you’ll find many tax advantages that follow. 

Contributions to Roth IRAs are made after tax, they grow tax-free, and withdrawals of contributed dollars are tax-free too. The only restrictions involve withdrawals of earnings. Earnings become tax-fee and penalty-free once the account holder turns 59 ½ and after five years since the first contribution.

The flexibility of being able to withdraw contributions without penalty can make a big difference for young account holders. Ideally, emergency savings are separate from a retirement savings account. In a pinch, however, the Roth IRA can serve as emergency savings for unexpected medical expenses or to help young people avoid taking on debt or liquidating assets to meet financial obligations.

Gift and Roth contribution limits

Parents and grandparents can provide the funds for the IRA contribution. In most cases, this means simply giving your kin the money so they make the contribution—helping them save rather than spend. Your TIAA Wealth Management advisor can also help you and the recipient of your gift set up an account and invest it.

To be eligible for a Roth IRA, your kid (or grandkid) needs to meet the contribution and income limits imposed by the IRS based on their income, not yours. The Roth IRA contribution limit is set by the IRS each year—in 2025, that limit is $7,000. But if your recipient earns less than $7,000, the contribution is limited to the amount of their earned income. And if they have income of more than $165,000 (or $246,000 in joint income if they’re married), they’re not eligible to make contributions to a Roth IRA.

Roth IRAs can sit nicely alongside a workplace retirement plan such as a 401(k) or 403(b), whose maximum contribution limits top out at $23,500 for 2025. Just make sure your child or grandchild isn’t using your Roth IRA gift as an excuse to skimp on their workplace retirement savings. They’re turning down free money if they’re not contributing enough to get the full employer match available to them.

If your child or grandchild is a minor, you can open a custodial Roth IRA for them. The same earned income requirement applies to minors. Custodial accounts are owned by the minor but controlled by the custodian until that person reaches adulthood, an age that varies from 18 to 21 by state.

Powerful compounding growth for early starters

TIAA Executive Wealth Management advisor Jim Schlag set up Roth IRAs with his three kids once they had taxable earned income from part-time jobs. To make it interesting—and educational—they each allocated 20% to a stock whose brand they liked and put the remaining 80% in a diversified stock index mutual fund.

“We observed how these investments behaved in up and down markets, and I think they learned from watching how different investments behaved in different market conditions,” Schlag said. “They also get the tax-free compounding from a Roth IRA that should turn into a large sum of money over their lifetime.”

Because of the power of compound growth, Gen Zers who start their retirement savings early get a sizable head start on retirement savings. Consider what happens if you contribute $1,000 per year for your child or grandchild during the ages of 18 through 25 and let that money grow for 42 years until age 67. Assuming a 7% annual rate of return, that $8,000 invested early in their careers would grow to $175,897 by age 67.²

Roth IRA benefits for first-time homebuyers

One additional benefit is the withdrawal exception for first-time homebuyers. With a Roth IRA, you can always withdraw—tax-free and penalty-free—a sum equal to the contributions you’ve made. Further, as a first-time homebuyer, the Roth IRA account holder can withdraw up to $10,000 of the account’s earnings without paying a 10% penalty, provided it has been five years since the first contribution to the fund. One downside: You’ll owe income tax on that $10,000.

We’re here to help.

To explore how a Roth IRA gift could benefit your loved ones, contact your TIAA Wealth Management advisor. Don’t yet have an advisor? Schedule an appointment.