Kid Roth: How Parents Can Raise a Millionaire

Last Updated Mar 16, 2010 7:56 PM EDT

Ask any investment advisor for their single best bit of retirement planning advice and you can put good money on hearing some version of "Start saving when you are young." Ask any young person what they think about the notion of setting aside part of their limited income in their teens and twenties and you are likely to hear some version of "Oh sure" accompanied by an emphatic eye roll. But this doesn't need to be an impassable divide. Parents can seed a kid's retirement by making contributions to a Roth IRA on behalf of their child. By taking full advantage of the power of compound growth over 40 or more years a parent can raise a millionaire child by investing just relatively modest sums today.

Kid Roth IRA rules As long as a child has earned income, the child can use money from someone else to fund an IRA. Doesn't matter if the kid is a teen with an after-school job or a Gen Y college grad. The only stipulation is that your kid must have earned income -- not investment income -- that was at least equal to the amount of the contribution. So for example, if your 17-year-old earned $2,500 in 2009 at a mall job, you could fund an IRA up to a max of $2,500. If your child is currently younger than 18, the fund company or brokerage will likely want the parent to set this up as a custodial IRA. Depending on your state's law control of the account will shift to the child at the age of 18 or 21. Not every brokerage or fund company offers IRA for minors; but plenty do. Schwab, T. Rowe Price and Vanguard will happily help you and your minor set up an IRA.

A Roth IRA is a slam dunk for your child; if they are very young with limited income they would garner no value from the deductibility of a Traditional IRA contribution right now. The ability to make tax-free withdrawals from the Roth IRA a few decades down the line is going to be a huge gift, given the likelihood that taxes are likely to be heading up, not down, as the nation grapples with a massive deficit.

A $100,000 gift for just $1,000 down Stick $1,000 in a Roth IRA for a 15-year-old today and by age 75 they could have more than $100,000 assuming an 8 percent annualized return. If your child had at least $5,000 in earned income this year they are eligible for the 2009 (and 2010) maximum contribution limit of $5,000. Get $5,000 into a Roth IRA account for a 17-year old today and you are effectively seeding a $500,000+ retirement fund at age 75 for your kid, assuming the same 8 percent annualized growth. Parents who keep up those Roth IRA contributions for a few years are likely to be raising a millionaire.
How to Raise a Millionaire For boomer parents with adult children, giving them the cash to fund an IRA is a profound way to help them build a more secure future. Remember, the first $13,000 of any gift to a child is free of the gift tax, so you're not going to run into any tax problems shifting up to $5,000 their way. Make a deal with your working 25-year old today that you will give them $5,000 a year until they are age 30 (for a total parental contribution of $25,000) that they leave invested in a Roth IRA until age 75 and they could have more than a million dollars set aside for retirement, based on your nice parental assist.

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