Young people should consider opening a Roth IRA as it is a valuable savings tool.

• Opening a Roth IRA for young people is a smart move towards their financial future.
• Minors will need an adult to help them open a Roth IRA.
• If a child earns money, they can have a Roth IRA regardless of their age.

As a mother of three and a financial advisor, I understand the importance of compounded interest, early work experience, and self-saving and investing.

For a while, my 15, 12, and 11-year-old kids have been involved in various tasks such as tutoring, filing, shredding, sweeping, and researching and creating infographics for friends and our own companies.

In addition to developing responsible work habits and meeting deadlines alongside their usual school work and extracurricular activities, this experience also provides them with practical knowledge on managing finances. It instills in them the importance of saving for the future and prioritizing crucial goals such as retirement at an early age.

Saving for our kids seems like a long time away for kids. However, starting early can provide significant benefits. You may be wondering, like many of my clients, what's the most effective way to save for our kids?

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

How a Roth IRA for kids works

Just as for adults, the IRS rules for kids having their own Roth IRA are straightforward.

In 2024, individuals under the age of 50 can contribute a maximum of $7,000 to any IRA account, regardless of whether it is a Roth, traditional, or a combination of both. However, if someone's earned income is less than $7,000, they can only contribute up to the amount of income they earned.

The child can contribute to a Roth IRA without needing to have earned income, as the money used to fund it can come from someone else. This allows the child to keep their earnings for immediate use while still building a financial foundation through the Roth IRA.

A Roth IRA can be established for a child by a relative or benefactor who is a parent, grandparent, or a generous individual.

If a child earns money, they can have a Roth IRA regardless of their age.

If the child is a minor, a parent or guardian must establish a custodial Roth IRA in their name and manage the investments until they reach the age of majority. Although the custodian makes the decisions, the child is the beneficiary, meaning the funds must be used for their benefit.

To contribute to a Roth IRA, the child must have earned income from traditional employment or self-employment activities. Money received from parents for chores or as an allowance, as well as cash gifts, do not count as earned income.

It is unlikely that most kids, particularly the younger ones, will be able to contribute the maximum allowable $7,000 annually for 2024, as they are restricted to the total amount they earned throughout the year.

Although the child is not obligated to file an income tax return, the parent or guardian must still maintain accurate records of any earnings used to contribute to a Roth IRA. Additionally, self-employment income may be subject to additional taxes such as Medicare and Social Security. It is advisable to seek the guidance of a tax professional to ensure compliance and maximize benefits.

Why I like the Roth IRA for youngsters

The Roth IRA is a "golden egg" savings vehicle for young people because it offers tax-sheltered savings and liquidity.

A Roth can be used as a long-term savings vehicle, but in case of an emergency, children have many years before retirement, so there are ways to access contributions without penalties or drawbacks.

Setting up a Roth IRA for young people is a smart move for their financial future. With early contributions, they can benefit from tax-free growth and build a substantial retirement fund before reaching retirement age.

Withdrawals during retirement can be tax-free if contributions are made with after-tax dollars, which is particularly advantageous for children who are in a low or zero tax bracket now, allowing them to grow their investments without the burden of taxes.

Starting early and contributing regularly to an account can result in significant growth over time due to the power of compound interest. For example, a 15-year-old who contributes $2,000 annually until age 65, with an average annual return of 7%, could see their account grow to nearly $1 million.

Unlike traditional IRAs, Roth contributions can be withdrawn at any time without penalties or taxes, and under certain circumstances, earnings can also be withdrawn without penalties for a first-time home purchase.

Unlike traditional IRAs, Roth IRAs do not require withdrawals at a certain age, allowing the account to continue growing tax-free for as long as the owner chooses. This benefit can be advantageous for young people who want more control over their retirement funds and can help them manage their retirement income.

Starting a Roth IRA can help young people develop financial planning, saving, and investment skills. The Roth IRA structure promotes a long-term perspective on finances, aiding young people in building a secure financial future.

Winnie Sun, co-founder and managing director of Irvine, California-based Sun Group Wealth Partners and a member of the CNBC Financial Advisor Council, discusses financial matters.