Do you want to jump start your child’s retirement with a million dollar, tax-free account? Consider this:
The million dollar idea
Once your child starts generating income, consider opening a Roth IRA and establishing a contribution objective to achieve before they finish high school. With an anticipated 8% rate of return, the funds invested by age 19 will potentially expand to forty times their value by the time they reach the current full retirement age of 67.
To illustrate, a $2,500 investment made before high school graduation could amount to $100,000 during retirement, whereas a $25,000 investment before graduation could increase to $1 million by retirement.
Why it works
Compound interest is a powerful tool for growing wealth. It’s earned on the initial deposit and the interest it generates over time, resulting in exponential growth. The longer you allow your investment to grow, the greater the compounding effect becomes. That’s why it’s important to start saving as early as possible. By beginning to save before high school graduation, your investment could have almost fifty years of compounding growth, which can potentially lead to significant wealth accumulation over time.
Even better, a significant advantage of Roth IRAs is that any earnings are TAX-FREE, as long as you follow the rules. Although contributions must be after-tax, the tax-free benefit on earnings can lead to substantial savings over time. However, the question is, how can you accumulate $25,000 in a child’s Roth IRA? Here are some helpful tips to get started.
Tips to achieve the goal:
Hire your child.
Roth IRA contributions are limited to the income your child earns. If you own a business or make some money on the side, consider hiring your child to help with cleaning the office, filing, or other tasks they can handle.
Look for young-age work ideas.
Babysitting, yard work, pet walking, shoveling, and lawn work are some of the ways to get your child earning an income at a younger age. Keep in mind that cash-based income may be more challenging to track, so it’s essential to keep accurate records of their earnings and consider filing a tax return, even if it’s not mandatory. Encouraging your child to earn their income can help them establish good financial habits and contribute to their future financial success.
Leverage high school years.
Your child’s highest earning potential before graduation is between ages 15 and 18. Encourage them to take advantage of summer jobs, internships, and part-time jobs during the school year to generate a steady income flow that can be used to contribute to their Roth IRA while still having some spending money. This approach allows them to maximize their earnings and start building a strong financial foundation for their future.
Parent or grandparent matching idea.
Maximize your child’s savings potential by utilizing a Roth IRA. Your child’s income can set the contribution limit, even if it’s not directly deposited into their account. Create a deal with your child to match every dollar they save for college with a contribution from a parent or grandparent to their Roth account. This approach serves as both a college savings plan and a retirement savings strategy, making it a smart and efficient way to secure your child’s financial future.
Helping your child get a head start on saving should ease any anxiety regarding retirement and help them focus on school, starting their career, and other personal development goals.