What if you could make your children millionaires or set the on the road to retiring with a hefty nest egg? Would you do it? Would you give them that gift if you were able? It is possible using a Roth IRA for your children to have their investment portfolio grow exponentially and far outpace a typical working adult’s investments.
How to Make Your Children Rich With A Roth IRA
A Roth IRA is a powerful investment tool because of the tax benefits that it provides investors. If you invest the maximum contribution of $5,000 each year for 40 years of your working life, you would have a nest egg valued at $1.29 million, assuming an 8% annual rate of return. This is a classic example of someone who systematically invests their maximum contribution into a Roth IRA with consistent discipline over the course of their working life from the day they start working at age 22, for example, until their retire at age 62, or 40 years of their lives. But, if you add just ten years to the same equation and start investing in a Roth IRA at the age of 12, you would have a nest egg worth $2.8 million by the age of 62.
Can Kids Contribute to a Roth IRA?
While it may sound a little strange, there is no minimum age that a person must be in order to establish a Roth IRA. But, you do have to have an earned income in order to invest in a Roth IRA. A child, or anyone for that matter, can only contribute to a Roth IRA an amount equal to what they earn for the year. So, if your child earns only $3,000 mowing the grass this summer, he or she can only invest up to $3,000 in a Roth IRA despite the full contribution limit being $5,000 for someone under the age of 50.
What constitutes an earned income? Does money you give your child for chores or an allowance count towards an earned income? The IRS says that does not count. But, if your child has earned money through babysitting, lawn mowing, commercials, modeling, and other ventures, he or she may income that qualifies as earned income. You may find that your child will have to file a tax return even though they would most likely owe no taxes if they earned very little throughout the year. You should consult with a financial planner or tax advisor if you have specific questions.
Other Options Available to Parents
There are many other options available to parents to allow them to help their children succeed financially if you did not want to go the route of a Roth IRA. There is nothing stopping a parent from opening a traditional mutual fund account in the child’s name. Also, you could enjoy the compounding tax free effects of a 529 College Savings Plan as well. Although, in order for the investment and its earnings to be withdrawn tax free, you would need to use the money on a qualified educational expense.
Is it worth the trouble to help your children set up a Roth IRA? It very well might be a great investment that earns them millions more than they would have had in retirement if they had waited. It can also help teach your kids about investing and building a habit of saving and investing into their lives at an early age. While a Roth IRA is a good option, it is not the only one. There are many investing options available to parents in order to help set their children up for success later in life.
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