As soon as your child starts earning income, you should consider opening a custodial Roth IRA. Roth IRAs are a hit among savers because you can pay your tax bill upfront and enjoy tax-free income later. This can be a perfect setup for your child since they are typically in a lower tax bracket when they are younger.
Even better, the financial knowledge gained could turn into a million-dollar Roth IRA for your child if you get the ball rolling now. If you're looking for the secret to helping your child get on the path to financial security, let's look at a few pointers.
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Contribute as much as you can
Anyone can contribute to a Roth IRA, even a 14-year-old child, as long as they have earned income for the year and their income doesn't exceed the annual limits. An adult will need to manage a custodial Roth IRA until the child is legally able to do so on their own, but this account could give your child the ultimate financial education as they step into adulthood.
Consistently making contributions to your child's Roth IRA is key to helping them child grow their portfolio and develop good savings habits. It's even better if you and your child can contribute the maximum amount, even as contribution limits rise.
If you don't know where to start, here are a few tips:
- Calculate your contribution limit: Although the maximum contribution limit is $7,000 for 2024, you can't contribute more than your child's earned income for the year. So if your child only earned $5,000 from their summer internship, their contribution limit is capped at $5,000.
- Review your contribution timeframe: The deadline to contribute to a Roth IRA for 2024 is the tax filing deadline, which is April 15, 2025. Decide when you want to start and when you want to make your final contribution.
- Determine your monthly or weekly contribution goals: Instead of contributing a lump sum all at once, you can contribute smaller amounts every month or week to reduce the pressure. If your child receives extra money during the year, consider adding some of it to the Roth IRA to help them achieve their goals.
- Teach your child about budgeting: Teach your child the importance of having a plan for every dollar they earn. Set up different buckets for expenses so that your child can balance saving goals with current needs and wants.
- Consider matching contributions: If your child commits to saving $3,500 of their paycheck in their custodial Roth IRA, you can reward them by contributing the other $$3,500 to help them max out their account for the year.
- Set up recurring deposits: To make it easier, set up automatic transfers so that the money is automatically deducted from your account each week or month. This removes the hassle of remembering to make consistent Roth IRA contributions.
Teach smart investing habits
Teaching your child how to save money is important for financial security, but it's not enough to get them to the million-dollar mark for retirement. For instance, if your child contributed $7,000 to their Roth IRA for 40 years, the account would be worth $280,000. But if your child invests the money and earns an 8% return, they could have a Roth IRA worth over $1.9 million.
As you can see, investing is a crucial part of the million-dollar Roth IRA equation. Since younger investors have a longer expected time horizon, they can generally take on more risk by loading up on more stocks in their portfolio and potentially generating higher returns. However, investing returns are not guaranteed, so you also need to teach your child to invest responsibly and avoid highly speculative trades.
Patience can pay dividends
Helping your child build a seven-figure Roth IRA is a long-term commitment, but the rewards are well worth the effort. By starting now, your child will have decades to watch the power of compound growth multiply their money over time. Additionally, they will have time to recover from losses and understand the importance of building a diverse portfolio of assets.
Get started with a plan of action and show your child how it all works. When they see the money in their account growing over time, they'll be even more excited to continue working toward their million-dollar Roth IRA.
