It's tempting to open a savings account for your kids and call it a day. But if you want to create the next millionaire, your best bet would be to open a Roth IRA (individual retirement account). It's one of the hottest retirement accounts on the planet -- granting you access to contribute after-tax dollars that will grow 100% tax-free. Simply put, if your child's Roth IRA reaches a million dollars, the entire one million dollars is theirs to keep once they reach 59 1/2 -- there's no need to share earnings with the IRS.
Before you run to the nearest brokerage to open an account, though, make sure your child actually qualifies to have a Roth IRA. Specifically, your child needs to have earned income for the year -- from working a job, mowing the lawn, or working in your business -- to be eligible for this retirement treasure.
Open a custodial account
Most brokerage firms do not allow minors to open a Roth IRA account on their own. Fortunately, many offer accounts in which the parent retains custody of the account, giving you full authority to manage the account assets and make decisions that are in the best interest of the child until they are legally able to control the account.
If you have no idea where to search for such an account, you can start by researching top brokerage firm products such as Fidelity's Roth IRA for Kids. This account lets you manage a Roth IRA for your kids or another kid in your family. Fidelity allows any adult to manage an account on behalf of a child who is earning money.
Contribute as much as possible
In 2021, the most anyone under 50 can contribute to a Roth IRA is $6,000. But you're never able to contribute more than your earned income for the year. So if your child made $3,000 babysitting for the year, you could contribute up to $3,000 to a Roth IRA in the child's name.
Aim to contribute as much money as possible to maximize the benefits. The more money you save in your Roth IRA, the more money you have available to invest. But don't feel pressured to contribute thousands of dollars every year. You can contribute $5 or $5,000 in any given year, it's up to you! But don't exceed the contribution limits or you'll be on the hook for tax penalties.
Invest in high-quality stocks
If you don't select investments for your child's Roth IRA, the money will sit there and you'll miss out on big time earnings -- especially during stock market highs. Take full advantage of the Roth IRA by investing in top-quality companies that have the potential for growth over a long period of time. That's the secret sauce to help your child become a millionaire before retirement.
There are thousands of stocks to choose from, so you want to pay attention to company performance, management, trends, and other factors that will help you determine a company's success potential. For example, investing in Apple would have proven to be a successful investment opportunity that could have easily turned $1,000 into $500,000 dollars. Apple has experienced an impressive record of growth over the last decade -- easily creating million-dollar portfolios for individuals who consistently maxed out their Roth IRA accounts and invested -- and the company isn't showing any signs of slowing down. It's also a dividend-paying stock, so kids can get rewarded with an extra stream of income in their retirement account.
Starting early comes with a lifetime of benefits
It's best to take advantage of the Roth IRA's unique benefits while your child is eligible. Think of the Roth IRA as a limited-time-offer type of account. Once someone's income exceeds the limits, you can no longer make a direct contribution to the Roth IRA. If you have a hunch that your child will be a high earner in the future, expose them to a Roth IRA now so that they can benefit from the incredible tax-free benefits in retirement -- an attractive feature that's become a huge hit among investors. Another bonus: You can always withdraw what you contribute without worrying about taxes.
The Roth IRA can also serve as a safety net for your child if everything doesn't go as planned and additional funds are needed. It can be used to fund your child's education or purchase a home. But the best rewards come when you're able to help your child build a Roth IRA over the long term -- giving them access to earnings that can put them on one of the simplest path to becoming a millionaire.