Let’s face it. One million dollars isn’t what it used to be. In fact, $1,000,000 in the year 2000 is equivalent to the purchasing power of about 1.7mil today.
Wow! 1mil isn’t even close to what it used to be. But that shouldn’t stop you from building wealth and preparing for retirement.
And there’s no better age to start doing that than fresh out of the hospital…right after being born. The sooner you start, the better off you are. Well, the sooner you start investing for your kids, the better off they will be.
By starting early, you can minimize the amount of money invested to reach 1mil or whatever goal number you have.
Millennials are ahead of Gen X and Baby Boomers, considering saving for retirement. On average, the typical millennial starts saving in their early 20’s. Gen Xers generally started in their 30’s, and Baby Boomers were even later.
Below, I’ll show you how to use the Roth IRA to get your kids started early and the difference that extra time can make.
Roth IRA
A Roth IRA is a tax-advantaged retirement account. If you believe that taxes will be higher when your children are of retirement age than now, then you should look at this.
Characteristics of a Roth IRA:
- Contributions made with after-taxed dollars
- Grows tax-free
- No required minimum distributions
- 2023 tax year contribution limit is $6,500
- Can only contribute earned income
- You can never contribute more than the earned income for the year
- After five years of having the account open, you can withdraw contributions before age 59-1/2 without penalty
- Early withdraw of earnings may come with penalties and taxes
Additional Characteristics of a Custodial Roth IRA:
- Child must be under the age of 18
- Minor must have employment income
- Adult (custodian) maintains control of the account, and it must be turned over when the minor reaches the required age, which varies by state
Your kids need earned income to contribute to this plan. This can either be a formal job or self-employment income.
The great news is that you can pay your kids up to $12,000 a year tax-free. This also becomes a deduction from your earned income.
For IRS purposes, your child’s job needs to be age appropriate and paid appropriately. For example, your two-year-old will be doing something other than data processing for you. And you won’t get away with paying them $10,000 a year for doing the dishes.
Jobs You Can Hire Your Kids to Do:
- Lawn mowing
- Babysitting
- Envelope Stuffing
- House Cleaning
- Photographs of your kids on your website, brochure, or postcards
- Washing Cars
- Washing Dishes
- Door-to-door flyer delivery
- Updating Social Media Accounts
- The list goes on…
What Do the Numbers Look Like:
You can do your own calculations HERE
Are you serious! With that small amount invested, my child can be a millionaire under 55. From this one investment?!
No, $1,000,000 isn’t what it used to be, but this calculation has their investment valued at over 2.5mil by retirement age. And that’s never maxing out their $6,500 yearly investment threshold. Which will likely go higher as the years go on.
Your child isn’t worried about retirement now anyway. However, you can use the Roth IRA to teach them about investing, money management, and financial freedom. All while giving them a massive head start.
Start it for them and get them started young. Showing is always better than telling.
Disclaimer: I’m not an accountant, and I suggest you talk with your tax accountant before moving forward with a Roth IRA custodial account.
You’ll also want to click HERE to review child labor laws:
