Putting coins in a piggy bank might be a fun way to jump-start your child's saving journey, but opening a Roth IRA (individual retirement account) could be the ultimate wealth builder.
Roth IRAs are packed with benefits, including tax-free withdrawals during retirement. And anyone with earned income can contribute to a Roth IRA. So if your child is working this year, you can set them up with a Roth IRA and position them for a million-dollar portfolio before retirement.
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Starting early can pay off
Granted, your child probably hasn't started their career yet, so retirement might not be top of mind. However, time is your child's best friend when it comes to building wealth. By taking advantage of compound interest and long-term investment growth, you'll put your child on the path to financial security.
Let's say your 15-year-old child earns $8,000 from mowing the lawn and tutoring in 2024. If you open a custodial Roth IRA and contribute the $7,000 maximum to your child's account, this could grow to about $197,000 by the time your child turns 50, assuming they earn an average return of 10% per year.
If your child continues to contribute the maximum amount to a Roth IRA, they could be on the path to becoming a millionaire before retirement. When your child reaches 59 1/2, they will be able to withdraw money tax-free from their Roth IRA.
Your 2024 game plan
Setting your child up for a million-dollar Roth IRA won't happen overnight. It'll take a combination of smart financial moves and long-term planning to help them get closer to the finish line. Here are some steps you can take in 2024 to get the ball rolling:
- Open an account: You can set up and manage a custodial Roth IRA for your child until they are legally allowed to control the account. Consult with a CPA or other tax professional to ensure you stick to the rules.
- Review contribution rules: You can't contribute more than your child's earned income for the year. Also, if your child's income exceeds the annual Roth IRA threshold, they won't be able to make direct contributions to the account for the year.
- Set contribution goals: You can match contributions that your child makes to the account to get them involved in the process. For example, if your child contributes $3,500 to the account, you can chip in $3,500 as well to reach the maximum Roth IRA contribution amount of $7,000 in 2024.
- Automate contributions: Teach your child how to put their savings on autopilot so they can reach their goal within a certain time frame. For example, if you set up recurring contributions of $584 from a checking account to a Roth IRA every month, you'll be able to max out their Roth IRA for 2024 in 12 months.
- Invest the funds: Your child won't have a shot at building a million-dollar IRA unless the money is invested in assets that grow over the long term. Consider showing your child various investment options while emphasizing that historical averages don't guarantee future performance.
- Discuss a holistic financial plan: Consider other accounts, such as savings accounts, emergency funds, and regular investment accounts, to complement your child's Roth IRA so they won't be tempted to dip into their account early. Although they can always withdraw contributions without taxes or penalties, it's easier to build a million-dollar Roth IRA when their money is constantly working.
Never underestimate the power of smart financial habits
While the idea of helping your child build a million-dollar Roth IRA may sound ambitious, it's possible with a few simple steps. However, you'll need to make sure your child is involved in the process in order for this to work. The more they know and understand, the more likely they will be to continue those habits when they take control of the account. Instilling smart financial habits in your child is a surefire way to pave the path for a financially secure future.
