Starting retirement planning early offers many benefits for kids, but figuring out how to get started can be overwhelming. Since your child likely doesn't have access to a 401(k) plan or employee stock purchase plan (ESPP), you can begin with a Roth IRA if they have earned income for the year. Given that your child is probably in a lower tax bracket now than they will be in the future, it makes sense to contribute after-tax dollars to a Roth IRA now in exchange for tax-free income later.
Although retirement may not be the most exciting topic to discuss with your child, showing them how their consistency can lead to a million-dollar retirement might pique their interest. Below are a few steps you can take this year to set your child up for a millionaire retirement.
Image source: Getty Images.
1. Know your options and the rules
Before you start stashing money away in a Roth IRA, you want to make sure your child meets the earned income requirement. If your child has already landed a paid summer internship or expects to receive a W-2 from a part-time job this year, you've likely met this requirement and can go ahead and open a custodial Roth IRA on your child's behalf. Consider consulting with a certified public accountant or another knowledgeable financial professional to ensure you're on track and not missing anything.
If your child is still searching for income opportunities, you can help them brainstorm ways to generate income. Encourage them to jot down their skills or explore common jobs for kids, such as dog walking, mowing lawns, or even working for your business if you have one. Then, reach out to your network to see whether anyone knows of any opportunities.
Although it is very rare for children to earn six figures, it does happen. If you find yourself in this situation, you'll want to keep tabs on your child's income to ensure it doesn't exceed the annual threshold for making direct contributions to a Roth IRA. If it does, your child can look into a traditional IRA and other ways to save for retirement.
2. Create a smart contribution plan
The Roth IRA contribution cap for anyone under 50 is $7,000 in 2024. However, if your child doesn't expect to earn that much this year, their contribution is capped at their earned income. For example, if your 16-year-old daughter earns $6,000 from a summer job in 2024 and doesn't earn any additional money, her contribution limit for 2024 would be $6,000.
Since you open a custodial Roth IRA on behalf of your child, you can manage the account until they can legally do so, typically at the ages of 18 or 21 in most states. This means you can also contribute money to the account, up to the maximum limit of $6,000 in this case, on their behalf.
However, the key to helping your child build a millionaire retirement is to get them involved in the process and ensure they have a stake in their financial future. One way to do this is by offering to match what they contribute to the account up to a certain limit, similar to a 401(k) company match. For instance, if they contribute $3,000 from their paycheck to a Roth IRA, which equates to $250 a month for 12 months, you could contribute another $3,000 to help them max out their Roth IRA for the year.
3. Show your child the possibilities
Investing is the secret sauce that can turn your child's annual contributions into a million-dollar retirement. It's important to sit down with your child and explain the power of compounding. Then, ask them to calculate how much their money can grow over time if they invest $7,000 annually into a Roth IRA and earn a certain annual return.
Below, you'll see how $7,000 invested annually can grow over four decades if the money grows at 8%, 9%, and 10%, which aligns with historical averages. This exercise will help them understand the impact of consistent investing and the benefits of starting early.
|
$7,000 Invested Annually For: |
Growing at 8% |
Growing at 9% |
Growing at 10% |
|---|---|---|---|
|
10 years |
$109,518 |
$115,922 |
$122,718 |
|
20 years |
$345,960 |
$390,352 |
$441,017 |
|
30 years |
$856,421 |
$1,040,027 |
$1,266,604 |
|
40 years |
$1,958,467 |
$2,578,043 |
$3,407,963 |
Even if your child doesn't reach a million dollars in a Roth IRA alone, the knowledge they gain can be applied to other retirement accounts and financial decisions they will have to make. Teaching your child how to set goals, be disciplined, and stay consistent will open the doors to a successful life and make a million-dollar retirement more possible.
