Opening a Roth IRA for Kids Can Help Your Children Build Wealth
Help Future Generations Build Wealth Tax-Free with a Roth IRA
Most new investors know that a Roth IRA can be one of the greatest tools in your investing arsenal. By contributing after-tax dollars to it, you are allowed to grow the money tax-free. There are no taxes owed on the profit. There are no taxes owed on the withdrawals once you reach retirement age. It's a fantastic deal.
If you want to help your child supercharge their own wealth building, one way you can do it is by opening a Roth IRA for kids.
There are a few complications that you need to work out to pull it off successfully, but they are worth the payoff. In the next few minutes, I am going to explain the reasons you might want to consider a Roth IRA for kids, and how you can improve your odds of successfully turning it into a money machine, churning out massive gushers of dividends, interest, and rents by the time your child retires.
The Major Advantage of a Roth IRA for Kids Is Time
Why would anyone bother opening a Roth IRA for kids? Time. Specifically, the power of compounding. The more successful you are, the easier it is to harness for the benefit of your family.
Imagine you are a prosperous dentist. You decide to open a Roth IRA for your son or daughter, and contribute $500 per month into it. You use this money to invest in a low-cost index fund that mirrors the Dow Jones Industrial Average or S&P 500. You reinvest all of your dividends.
When your child turns eighteen, you have him or her take over the funding responsibilities. Further, imagine that the account grows at the same rate those indices have for the past century or more. You never increase your contributions to keep pace with inflation.
By the time your kid reached retirement age, or 65 years old, that Roth IRA would have $29,362,244 in it.
If they waited until they were the age of Warren Buffett, the 82 year old who has amassed one of the largest fortunes in history through his holding company Berkshire Hathaway, the Roth IRA would contain $148,653,856.
If your child then invested everything in blue chip stocks with good dividend yields, he or she would generate nearly $6,000,000 per year, or $500,000 per month, in cash income. Not a single penny in income taxes would be owed.
Why People Don't Take Advantage of the Time Value of Money and a Roth IRA for Kids
The biggest reason people fail to take advantage of the staggering power of compound interest, which Albert Einstein called the greatest force in the universe, is a lack of knowledge. The average guy simply has no clue that saving $6,000 per year over 82 years, or $492,000 in total, can lead to a fortune of nearly $150 million. They don't understand how you can earn interest on your interest or dividends on your dividends. It isn't taught in schools. It isn't hammered relentlessly in churches. It isn't broadcast on television. It seems boring, until you realize that it is the golden ticket that can unlock every door and pry open opportunities that would otherwise be beyond your family's reach.
All it takes is a little foresight by you, the parent. Thanks to you, your child should never have to worry about the government cutting their Social Security. They should never have to worry about eating cat food or being without heat. They should never have to worry about getting evicted from their home, short of some catastrophic personal tragedy such as drug addiction, a health crisis, or a gambling problem.
There Is One Potential Catch If You Want to Open a Roth IRA for Kids
The biggest challenge you will face when you open a Roth IRA for kids is that your child needs to have earned income. That is, if they save $6,000 per year, the current maximum as of 2012 for those under 50 years old, that money can't be a gift. They need to have generated it as income, filed a tax return, and paid income taxes on it.
That might seem like a problem for a 9 months old baby but it isn't as insurmountable as you think. If you or a family member owns a business, hire the child to act in commercials, to appear in print ads, or on billboards. What is a tax deductible expense to you becomes income to them, taxed at a much lower rate, and is capital they can put aside into their Roth IRA. Once they get a little older, hire them to do chores or mow the lawn. When they are teenager, let them get their first job. They could then put their entire paycheck into the Roth IRA and then you could give them a spending money allowance equal to whatever their paycheck was.