My 16-year-old son worked a summer job a
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My 16-year-old son worked a summer job and earned $4,800 this year (W-2 income, taxes withheld). We want to open a custodial oth IA for him to get him started on investing early.
A few things are confusing us:
1. The 2024 IA contribution limit is $7,000 — but he only earned $4,800. Does that mean his max oth IA contribution is $4,800 (i.e., capped at earned income)?
2. He also has $1,200 saved from gifts and allowance over the years. Can we contribute the $4,800 from earnings AND add some of that $1,200 as well, or is the total cap strictly his earned income?
3. Does it matter who actually deposits the money — can we as parents put the $4,800 in on his behalf, or does the money legally have to come from his own bank account?
4. What brokerage should we look at for a custodial oth IA for a minor (Fidelity, Schwab, Vanguard) and what are the key differences?
We want to instill good habits but want to make sure we do this correctly from a tax standpoint.
Answer
A custodial oth IA is tax-and-securities territory, not household cashflow — and this pack doesn't carry the US oth IA statute text or give tax rulings, so for questions 1–3 the IS is the source you read first, not us.
**Q1 — Is his cap $4,800 or $7,000?**
**$4,800.** Per IS Publication 590-A (*Contributions to an IA*), the oth IA cap for the year is the **lesser of** the annual dollar limit ($7,000 in 2024) **or** his earned income that year. W-2 wages count as earned income; $4,800 < $7,000, so $4,800 is the cap. Find it in Pub. 590-A on irs.gov.
**Q2 — Can the $1,200 of gift / allowance money be added on top?**
**No.** Per the same Pub. 590-A chapter, the cap is **earned income only** — gifts, allowance, and unearned income (interest, dividends, capital gains on assets he didn't earn the money to buy) do not raise it. So the IA contribution stops at $4,800; the $1,200 sits outside (a taxable brokerage or savings account in his name or yours until he uses it).
**Q3 — Can you as parents deposit it?**
**Yes.** Per the same Pub. 590-A chapter, the contribution that counts against his limit is the **total deposited on his behalf** — not whose bank account it came from. You can fund the $4,800 from your own account; it's still his contribution, still under his $4,800 cap, and he reports it on his Form 1040 for the year earned.
**Q4 — Which brokerage (Fidelity / Schwab / Vanguard)?**
We don't pick. This pack's US register confirms SEC / CFPB oversight (Source: https://www.sec.gov/ · accessed 2026-09-02), and all three named firms operate as SEC-registered broker-dealers. Beyond that, run the same six checks against whichever one you're actually considering:
1. **Licence** — verify the custodial-account entity on FINA BrokerCheck and the SEC Investment Adviser Public Disclosure (IAPD) before you open.
2. **Promisor** — the legal name on the custodial-account agreement, not the friend who recommended it.
3. **Contract wording** — read the fee schedule, the fund menu (which mutual funds / ETFs are available inside the IA), and the conditions on contributions, transfers, and beneficiary designation.
4. **Liquidity / withdrawal clock** — oth IAs carry a 5-year clock on qualified withdrawals of contributions; ask the firm which distributions need its paperwork.
5. **Custody if the seller is gone** — SIPC coverage and separately custodied assets.
6. **Disclosure location** — fees and any growth / yield example in the same document?
**Two more reads for you before you fund it**
- **IS Pub. 590-B** (*Distributions from IAs*), on irs.gov — the second half of the IA rules; covers the 5-year clock and qualified-distribution conditions.
- **Your state's UTMA / UGMA statute**, on your state government's official site — short read on what "custodial" means for a minor and when the account converts to his name at the age of majority (often 18 or 21 depending on your state).
The choice of brokerage, the fund inside the IA, and the timing of the contribution all stay with you.