Editorial: Your child needs a Roth IRA. It is a “golden egg” savings instrument for young people

As a financial advisor and mother of three children, I know the power of compound interest and the value of early work experience and learning to save and invest for yourself.

My kids (ages 15, 12, and 11) have been tutoring, filing, shredding, cleaning, and even doing info for friends and their own companies for a while now. I research and create graphics.

This will not only help you develop responsible work habits and meet regular academic and extracurricular deadlines, but will also give you practical experience in managing your income. It teaches children from an early age the importance of saving for the future and prioritizing important goals like retirement.

For children, it seems like a long time ago. But starting early can have big benefits. So, you may be wondering, like many of my clients, what’s the best way to save for your kids?

I believe the answer is for them to save in a Roth Individual Retirement Account.

Yes, children can have their own Roth IRA. And just like adults, the IRS rules are pretty straightforward.

In 2024, the total amount that individuals under age 50 can contribute to an IRA account, whether Roth, traditional, or a combination of both, is $7,000. If someone’s earned income is less than that, they can only contribute up to the amount of their earned income and no “endowment” is provided.

Although your child must have income to qualify for contributions, the funds used to fund a Roth IRA can be contributed by others. This means your child can keep the income for immediate expenses, while the Roth IRA is funded separately, helping your child build a financial base without lining their own pockets. .

Parents, grandparents, or generous relatives or sponsors can set up a Roth IRA for their child.

There is no minimum age requirement to contribute to a Roth IRA. If your child can earn money, they can have a Roth IRA.

However, if the child is a minor (under 18 in most states and under 21 in some states), a parent or guardian can open a custodial Roth IRA in the child’s name until the child reaches the age of majority. You have to manage your investments. The administrator makes decisions about the account, but the beneficiary is the child. That is, the funds must be used for the benefit of the children.

Learn more about these income requirements: To contribute to a Roth IRA, your child must have an income. This income can come from traditional employment, such as part-time work, or self-employment activities, such as babysitting or mowing lawns. Money or cash gifts received from parents for chores or allowances are not counted.

Most children, at least the younger ones, are unlikely to earn the maximum allowable annual contribution of $7,000 in 2024, which would be limited to the total amount earned in that year.

Even if a child does not have to file an income tax return, a parent or other guardian must carefully record the earnings used for Roth contributions. Self-employment income may be subject to additional taxes, such as Medicare and Social Security. To ensure compliance and maximize profits, it is wise to consult a tax professional.

I consider Roth IRAs to be a “golden egg” savings vehicle for young adults. This is because not only is this account tax-free, but it also benefits from liquidity.

The Roth can be treated like the long-term savings vehicle it was originally intended for, but in the event of an emergency, your children can contribute without penalty or other disadvantages because their retirement is decades away. There are ways to access the money.

Establishing a Roth IRA for young adults is a powerful way to put them on the path to financial security. By starting early, you can take full advantage of tax-free growth and potentially accumulate a large retirement fund by the time you reach retirement age.

There are other benefits as well. Contributions are paid after-tax, so withdrawals at retirement are tax-free if certain conditions are met. This is particularly advantageous for children who are likely to be currently in low- or zero-tax brackets, allowing them to grow their investments without paying tax.

Additionally, if you start early, your account can benefit from decades of compounding interest, which will significantly increase your balance over time. For example, if a 15-year-old contributed $2,000 every year until age 65, the average annual rate of return would be 7% and the account could grow to nearly $1 million.

Unlike traditional IRAs, Roth contributions can be withdrawn at any time without penalty or taxes, and even earnings can be withdrawn penalty-free under certain circumstances, for example, for a first-time home purchase. Masu.

Another advantage is that, unlike traditional IRAs, Roth IRAs do not require withdrawals at a specific age, so the account can continue to grow tax-free for as long as the owner chooses. This could give young people more control over their retirement funds and give them an advantage in managing their retirement income.

Additionally, starting a Roth IRA can help young people learn about investing, saving, and financial planning from an early age. The Roth IRA structure encourages a long-term outlook on finances and helps young people build a secure financial future.

— Winnie Sun, co-founder and managing director of Sun Group Wealth Partners, based in Irvine, California. She is also a member of the CNBC Financial Advisor Council.