- Financial Literacy for Teens and Students: Money Skills Before the First Paycheck
- Teens and Money: Why Whose Name Is on the Account Matters for College Aid (you are here)
This is part 2 of 2 of our guide to Financial Literacy for Teens and Students. It picks up where Financial Literacy for Teens and Students: Money Skills Before the First Paycheck leaves off, and it is written to stand on its own: the key ideas are restated where you need them.
The FAFSA turns savings into an expected payment through fixed rates in the Student Aid Index (SAI) formula. A dependent student’s own reportable assets count at a flat 20%. Parents’ assets are first reduced by an asset protection allowance, then converted at 12%, and the result passes through a contribution schedule of 22% to 47%, so each parental dollar adds at most 12% × 47% = 5.64 cents. Retirement accounts, a student’s Roth IRA included, are not on the list of reportable assets in the 2027–28 SAI guide. Put $10,000 three ways: in a custodial (UTMA) account, which legally belongs to the student, the SAI rises by $10,000 × 20% = $2,000; in a parent-owned 529 plan or savings account, by at most $10,000 × 5.64% = $564; in a Roth IRA, by $0. A higher SAI can reduce need-based aid by up to the same amount (4.6).
For a family that expects to qualify for need-based aid, that ranks a teen’s long-term money: the Roth IRA first, up to the earned-income limit; a parent-owned 529 next (4.4); accounts in the student’s name last. A custodial account is also an irrevocable gift: at the state’s age of majority, usually 18 or 21, the money becomes the young adult’s to spend.
Time does most of the compounding. $1,000 placed in a Roth IRA at 16 and left for 50 years at an assumed 7% average annual return (the assumption Parts 6 and 7 use — not a promise) grows to $1,000 × 1.0750 ≈ $29,457, tax-free under the Roth rules. The same $1,000 contributed at 36 gets 30 years: $1,000 × 1.0730 ≈ $7,612.
Scams aimed at students. New jobs, rentals and aid forms make students easy targets:
- Fake jobs and overpayment checks — you deposit their check and send part back; days or even weeks later the check bounces, and the money you sent is gone.
- Money-mule offers — being paid to “receive and forward” funds launders stolen money and can carry legal consequences for you.
- Paying for free aid — the FAFSA is free at studentaid.gov; a fee to “file” it or “unlock” a scholarship is a red flag.
- Irreversible payments — rental deposits, tickets or “investment coaching” paid by Zelle, gift card or crypto cannot be clawed back (2.3).
Section 13.2 covers scams in depth; 13.4 is the playbook if an account is compromised.
The summer-job example assumes a payroll job, a dependent with only wages, and no accounts in the teen’s name. These situations change the tax, the paperwork or who controls the money:
| Situation | What changes | Why | Number or rule |
|---|---|---|---|
| Working for a parent’s sole proprietorship, under 18 | No Social Security or Medicare tax | Family employment is excluded from FICA | Also for a partnership of the child’s parents; not for a parent’s corporation (IRS Pub. 15) |
| Babysitting or yard work as a household employee, under 18 | The family need not withhold FICA | Household work by an under-18 is exempt unless it is the worker’s principal occupation; for a student it never is | IRS Pub. 926 (2026); the adult threshold is $3,000 of cash wages |
| Paid directly by clients, no W-2 | Self-employment tax and a required return | No employer pays half the FICA | 15.3% on 92.35% of profit once net earnings reach $400 |
| Tips from a restaurant or valet job | Tips are wages for every tax; the new tips deduction lowers income tax only | Cash tips must be reported to the employer | Report $20 or more a month by the 10th of the next month (IRS Topic 761) |
| Interest, dividends or gains above $2,700 | The excess is taxed at the parents’ rate | Kiddie tax (above) | Form 8615; applies through age 23 for dependent full-time students |
| Wanting a credit card before 21 | Approval needs your own income or a co-signer | Credit CARD Act rules under Regulation Z | Co-signer must be 21 or older; the authorized-user route needs neither (3.7) |
| Parents open a Trump account | Contributions need no earned income | A separate account type for children under 18 | Up to $5,000 a year from July 4, 2026; no withdrawals before the year the child turns 18; then taxed like a traditional IRA |
| Contributing more to a Roth IRA than you earned | The excess is penalized until removed | Contributions are capped at taxable compensation | 6% excise tax a year on the excess (IRS Pub. 590-A) |
Where college costs fit. The 2027–28 FAFSA opened on September 23, 2026, and it is the gateway to federal grants, work-study and federal loans. Section 4.6 covers grants and education tax credits before borrowing; Part 4 covers student loans and their 2026 repayment rules.
Route each check from a first job in this order. (1) Move a fixed slice to a savings account the day it arrives until it holds $500. (2) Money you will not need for at least five years goes into a custodial Roth IRA, up to the lesser of your earned income for the year or $7,500 (2026). (3) Money for anything within five years, such as a car, a laptop or a college deposit, stays in savings. (4) Spend the rest by plan. Use a debit card or an authorized-user card until 18; after that, a secured card paid in full every month (3.7).
Assumptions: five years is long enough to ride out a stock market fall, and Roth contributions can come back out if life changes. Ignore the rule when your earned income for the year is still uncertain, since a contribution above what you end up earning is taxed 6% a year until removed: wait until the job’s last paycheck, because contributions for a year are allowed until the following April’s filing deadline.
Sending money back from a check that has not cleared. A “mystery shopper” or remote-assistant job mails a $2,450 check and asks you to keep $450 as pay and send $2,000 on by gift card, Zelle or crypto. By law banks must make deposited funds available quickly, so the money appears in your balance; but a fake check can take weeks to be discovered, and when it is, the bank reverses the $2,450 and you must repay whatever you spent from it (FTC). The $2,000 you sent cannot be recalled. That is $2,000 ÷ $4,432.80 = 45.1% of everything the summer job in the example above kept.
How to avoid it: no real employer pays you in advance and asks for part of it back. “Available” is not “cleared.” Never forward money from a deposit from someone you have not met; call the issuing bank at a number from its own website, not the one printed on the check, and report the offer at ReportFraud.ftc.gov (13.2, 13.4).
Can a teenager open a Roth IRA?
Yes, if the teen has earned income from a job or self-employment; there is no minimum age. A minor’s account is a custodial Roth IRA, managed by a parent until the age of majority. The 2026 limit is the lesser of $7,500 or the teen’s earned income, and a parent may provide the money. Contributions can be withdrawn at any time without tax or penalty; earnings generally stay in until 59½.
Do teenagers have to file taxes for a summer job?
Usually not, but they often should. A dependent with only wages must file for 2026 only if earned income tops $16,100, yet any federal income tax withheld comes back only through a return: $240.64 for the $4,800 job above. Self-employment is different: net earnings of $400 or more from dog-walking, tutoring or similar work require a return and self-employment tax.
Should a teenager claim exempt on a W-4?
Only if the teen owed no federal income tax last year and expects to owe none this year, which is typical for a dependent earning well under $16,100. Claiming exempt stops income tax withholding, not Social Security and Medicare. The 2026 exemption expires, and a new Form W-4 is due by February 16, 2027. A teen with several jobs or investment income should check the numbers first.
Do teens pay Social Security and Medicare tax?
Yes, at the same 7.65% as adults, on almost all wages, and it is not refunded. Two exceptions apply to under-18s: work for a parent’s sole proprietorship (or a partnership of both parents), and household work such as babysitting in a family’s home when it is not the teen’s principal occupation. Self-employed teens pay 15.3% on 92.35% of profit once net earnings reach $400.
At what age can you get a credit card?
At 18 you can apply for your own card, but until 21 the issuer must see independent income that can cover the payments, or a co-signer aged 21 or older. Before 18, the usual route is being added as an authorized user on a parent’s card, which many issuers report to the credit bureaus. A secured card backed by your own deposit is the common first card after 18 (3.7).
Can a minor open a bank account alone?
Usually not. Most banks require a parent or guardian as joint owner of a checking or savings account until 18, because minors generally cannot be held to contracts. A joint teen account gives the adult full access to the money. Leave overdraft coverage on debit card purchases off, as it is unless you opt in: a declined purchase costs nothing, while a covered one can cost a fee of around $35 (2.4: Overdraft & NSF Fees — and Avoiding Them).
Your first paycheck is smaller than hours × wage because FICA takes 7.65% at any age and payroll withholds federal income tax as if you earned that check every pay period of the year. A dependent with only a summer job usually owes no income tax at all: on 2026’s rules a $4,800 job is covered by a standard deduction of earned income + $450, so the $240.64 withheld comes back, but only if you file a return, while the $367.20 of FICA is never refunded. Earned income also opens a custodial Roth IRA, up to the lesser of $7,500 or what you earned, and time does the work: $1,000 at an assumed 7% grows to about $29,457 over 50 years against $7,612 over 30. Keep debit-card overdraft coverage off, build a few hundred dollars of savings with an automatic slice of every check, start credit as an authorized user or with a secured card, and never send money a stranger asks for by Zelle, gift card or crypto, because it cannot be clawed back.
Three questions on this chapter. Decide on your answer first, then click “Reveal Answer.”
1. A student puts $1,000 into a Roth IRA at 16 and leaves it for 50 years at an assumed 7% average annual return. Roughly what will it be worth?
- $29,457
- $4,500
- $7,612
- $53,500
Reveal Answer
Answer: A. Compound growth is $1,000 × 1.07^50 ≈ $29,457. Simple interest gives $1,000 × (1 + 0.07 × 50) = $4,500; 30 years gives $7,612; multiplying by 1.07 × 50 instead of raising to the 50th power gives $53,500. (Part 1.7)
2. A 17-year-old earned $3,000 from a part-time job in 2026, and her parents offer to put $7,500 into a custodial Roth IRA for her. What is the most that can go in for 2026?
- $5,000, the annual cap for accounts held by minors
- $7,500, since her parents are supplying the money
- $3,000, the amount of her taxable compensation
- $0, since a minor cannot hold an IRA of her own
Reveal Answer
Answer: C. The 2026 limit is $7,500 or taxable compensation, if less, and a parent may fund it only up to what the teen earned. There is no minimum age; a minor simply uses a custodial account. (Part 1.7)
3. Under the 2027–28 Student Aid Index formula, how much does $10,000 held in a student’s own custodial (UTMA) account add to the SAI, compared with the most the same $10,000 can add in a parent-owned 529 plan?
- $1,200 versus at most $470
- $2,000 versus at most $564
- $564 versus at most $2,000
- $0 versus at most $564
Reveal Answer
Answer: B. Student assets count at 20%: $10,000 × 20% = $2,000. Parent assets are converted at 12% and then assessed at no more than 47%: $10,000 × 12% × 47% = $564. A Roth IRA is not a reportable asset, so it adds $0. (Part 1.7)
- Publication 501 — Filing requirements
- Federal Student Aid (studentaid.gov) — The free application
- Card issuers and applicants under 21 — CARD Act under-21 rule
- Guidance on Trump accounts (Notice 2025-68) — Contribution rules
- Form W-4 (2026) — Withholding steps
- Trump accounts — Accounts for children