Op-ed: Your kids need a Roth IRA. It is the “golden egg” savings vehicle for young people

As a financial advisor, mother of three, I know well 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, sweeping, mopping, and even researching and creating infographics for friends and our own companies for a while now.

Not only did this help them develop responsible work habits and meet deadlines around regular school and extracurricular activities, it also gave them hands-on experience managing an income. It teaches them at a young age the value of saving for the future and prioritizing important goals like retirement.

To children, that seems eons away. But starting early can offer tremendous benefits. Then, you may be wondering – as many of my clients do – what is the best way to save for our children?

I think the answer is for them to save in their own individual Roth retirement accounts.

Yes, kids can have their own Roth IRA — and just like for adults, the IRS rules are pretty simple.

For 2024, the total contribution a person under 50 can make to any IRA account — whether Roth, traditional or a combination of the two — is $7,000. If someone’s earned income is less than that, they can only contribute up to the amount of their earned income – no “gift money”.

While the child must have earned income to qualify for contributions, the money used to fund the Roth IRA can be contributed from someone else. This means the child can keep their income for immediate spending, while the Roth IRA is funded separately, helping them build a financial foundation without dipping into their own pockets.

Parents, grandparents, or any generous relative or benefactor can set up a Roth IRA for a child.

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

But if the child is a minor—under 18 in most states, but under 21 in some states—a parent or guardian must open a custodial Roth IRA in the child’s name and manage the investments until the child reaches the age of majority. Although the custodian makes decisions about the account, the child is the beneficial owner, meaning the funds must be used for their benefit.

More on these income requirements: To contribute to a Roth IRA, the child must have earned income. This income could come from traditional employment, such as a part-time job, or self-employment, such as babysitting or lawn mowing. Money received from parents for chores or as an allowance does not count, nor do cash gifts.

Most children, at least the youngest, are unlikely to earn the maximum allowable annual contribution of $7,000 for 2024 and are limited to the total amount they earned during the year.

Even if the child is not required to file an income tax return, the parent or other custodian must keep careful records of the earnings that are used to contribute to the Roth. Self-employment income may be subject to additional taxes, such as Medicare and Social Security. It is wise to consult a tax professional to ensure compliance and maximize benefits.

I think the Roth IRA is a “golden egg” savings vehicle for young people because not only is the account tax-sheltered, but it also has the benefit of liquidity.

A Roth can be treated as the long-term savings vehicle it was designed for, but in an emergency, since the kids have decades ahead of them before retirement, there are ways to access the contributions without penalties or other downsides.

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

There are other advantages as well. Contributions are made with after-tax dollars, so withdrawals during retirement can be tax-free, provided certain conditions are met. This is particularly advantageous for children, who are likely to be in a low or zero tax bracket now, allowing them to grow their investments without the burden of tax.

Plus, starting early allows the account to benefit from decades of compound interest, growing the balance significantly over time. For example, if a 15-year-old contributes $2,000 annually until age 65, with an average annual return of 7%, the account could grow to nearly $1 million.

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

As another benefit, unlike traditional IRAs, Roth IRAs do not require withdrawals at a certain age, allowing the account to continue to grow tax-free for as long as the owner chooses. This gives young people more control over their retirement funds and can be advantageous in managing their retirement income.

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

— By Winnie Sun, co-founder and managing director of Sun Group Wealth Partners in Irvine, California. She is also a member of CNBC’s Board of Financial Advisors.