Saving up money for specific goals has been, for good reason and with good results, a healthy and beneficial habit to develop from childhood, from traditional piggy banks to allowances, from saving accounts to educational funds.

Another valuable and rewarding tool might not spring to mind, but it pays rich rewards: a retirement fund, specifically a Roth IRA.   

Let’s walk through the basics and advantages of a Roth IRA, especially for minors.  

Young earner advantages

Saving for retirement often begins in earnest when someone begins their full-time career, when employment includes a retirement plan with the employer. Before then, however, even a little income can yield valuable retirement savings opportunities by making contributions to a Roth IRA.

The same annual limits apply as for adult contributors, currently $6,500, but young earners are poised for two advantages.

First, their income is unlikely to reach levels where they would owe income tax, but the funds in the Roth IRA still grow tax-free. Also, the earlier the contributions start, the longer these funds can grow, and time is one of greatest contributors to financial growth, so younger contributors will reap the rewards.

Custodial accounts

Roth IRAs can be set up at age 18 but before that threshold, an adult can set up a custodial Roth IRA for a younger earner, which can then be transferred when they become a legal adult at the age of 18 or 21, depending on state law.

The key is that the contributions be justified as earned income, so gifts and allowances do not count. Income from part-time work, summer jobs, paid internships, even at the workplace of a parent, can count, as long as it is reported appropriately.

Business owners can formally pay minors to perform errands and chores at work and this can provide income that can be contributed to an IRA.

Family members with means also can offer to make the Roth contributions for the minor as long as it falls below the allowable amounts.

The maximum contribution for 2023 is either $6,500 or the annual earned income of the individual, whichever is lower. Any of these methods support the minor to earn their spending money but also benefit from long-term investment and planning.

Avoiding college debt

The repayment of loans that students take out in college has been making headlines this year, many of them alarming. The flip side of early, disciplined saving is early debt.

As the ongoing uncertainty and debate about repayments highlight, student loans can and will have cascading negative consequences for the future financial health of graduates.

I recommend as strongly as possible that students and families prioritize the avoidance of loans and debt in a college education.

Avoiding debt entirely in a college education can seem daunting or impossible, but more and more families are finding that it is in everyone’s interest – the student’s and the family’s – to pursue education with fiscal discipline.

Many factors can contribute to attaining a quality education while staying on a financially healthy path. Students can choose successful paths from a broader array of educational institutions and programs than ever before, from certifications to community colleges, as well as more traditional higher education.

Make a plan

Finishing school and launching a career, while developing adult relationships and exploring the world with greater independence and flexibility, will involve a host of new financial decisions.

These decisions can seem daunting, but they can have consequences decades later. No one can predict the future of most economic conditions and changes, so when the choices and opportunities seem vague or overwhelming, return to this perspective: set the goal, make a plan, and then you can (and will!) revise and update that plan.

This of course holds true for many journeys in life – career, personal, spiritual – as well as financial. Rather than worry about or defer financial plans, keep it simple and commit to some basics, and just expect that changes and revisions to those goals and plans are inevitable.

Nicholas Mercer is a certified financial planner and wealth advisor at Piton Wealth in Kennewick.