There might not be a one-size-fits-all manual for raising a child, but there are simple steps you can take to put your child on the path to building wealth. For example, the Roth IRA (a special individual retirement account) comes with incredible features that allow kids who earn income to stash away money in the account and accumulate tax-free income.
Of course, there are rules you must follow and strategies to implement to make this all possible. But the best part is knowing that you don't need thousands or even hundreds of dollars to get started. By starting with $25 per day, you can give your child a head start to the $1 million mark, and they won't have to deal with the intricacies of taxes later.
The clock is ticking, so we'll start with a few items you need to know to give your child the best chance at financial success.
Open a Roth IRA for your child
As we mentioned earlier, if your child has earned income for the year, they are eligible to contribute to a Roth IRA. Earned income can come from a variety of sources including hourly wage jobs or summer work opportunities such as building a babysitting or neighborhood lawn-mowing business. Some have even claimed earned income from working in a family business, although you may want to check with your accountant to see what will pass IRS muster. Then, any adult -- whether it be an aunty, grandpa, or family friend -- can open and supervise the Roth IRA on behalf of a child.
There are contribution limits associated with the Roth IRA. For 2021, you can contribute a maximum of $6,000 on behalf of a child that is earning income. If the child earns less than $6,000, the contribution is limited to the amount earned for the year. Let's say a child earns $3,000. The maximum allowed contribution for the year will be reduced to $3,000.
That may sound like a lot of money to consider contributing to a child's retirement account if you're just getting started. But if you can set aside just $25 per weekday, you'll be able to contribute $125 per week. That adds up to $500 per month and $6,000 per year, which positions your child to have more money to invest and grow.
Boost your portfolio with high-quality stocks
Saving money in the Roth IRA is one part of the equation, but investing your contributions is the other piece that is extremely important. Think about it: If you can only save a maximum of $6,000 a year or $25 per day, it would probably take over a century to reach a million dollars. That's a long time to wait. Investing is the key ingredient that small contributions into $1 million before your child retires.
There are thousands of investment opportunities available on the market, but growth stocks are usually the way to go for younger investors. Growth companies increase their revenue and earnings faster than the overall economy. These stocks may come with a premium price tag, but they provide one of the best ways for young people to expedite their wealth journey in the stock market.
For example, Amazon.com (AMZN 0.55%) has proven to be one of the greatest growth stocks in the 21st century. In 2016, you could have purchased a share of Amazon stock for around $600. Now, the stock price is over $3,100 per share. If you purchased 10 shares of Amazon stock in 2016, they would be worth over $31,000 today.
You can always sell a stock if you spot a better one. There aren't tax consequences from sales inside the Roth.
Make the most of your child's time
Time is the greatest asset that kids have, and it can work in their favor when it comes to investing and building wealth.
After your child reaches 59 1/2, they will be eligible to withdraw all the earnings in their Roth IRA account 100% tax-free. They may also qualify for an extra stream of income every month or quarter if you start adding some dividend-paying stocks to their portfolio now. When they are eligible to enjoy the benefits of the Roth IRA, they would have exponentially grown their investments through the power of compounding and turned $25 per day into $1 million.
Don't wait on the lottery for financial freedom. Your child will need earned income, but with a Roth IRA, high-quality stocks, and a commitment to invest in your child's future for $25 per day, you can prepare your child for financial success.