#48. How To Make Your Child A Tax-Free Millionaire
Updated: Mar 21
The wonderfulness of a Roth IRA. Imagine waking up at 60 years old and having $1,000,000 (in today's value) sitting in a tax-free retirement account without you ever having to contribute a penny.
This is the incredible power of using a Roth IRA to save for your child's future.
When I say your child could be a millionaire in 60 years without ever contributing a penny, I am saying a millionaire in today's standards. It would technically be approximately $3,614,000 sitting in the IRA in 60 years not accounting for inflation.
So, how is it possible to invest in a Roth IRA for your child so they can be a tax-free millionaire at 60? The following will discuss how to do it and things you will need to consider.
Additionally, as with all my other articles, this is not to be considered official advice. Please consult a financial adviser and/or tax professional before implementing this awesome and underused strategy.
There Is No Age Requirement For Contributing To A Roth IRA
The primary requirement for your child to be allowed to contribute to a Roth IRA is that they have earned income. Then, you can only contribute up to the amount of earned income they received. For this strategy to work, your child must earn $5,520 a year starting at the age of ten years old.
Before everyone starts getting super upset about how I think a ten year old can get a job, there are clever ways you can have your child get earned income.
Here are 30 non-age specific ways that your child could start earning income:
Dog walking or pet sitting
Online surveys or freelance work
Selling items online
Part-time jobs (depending on local laws and age)
House cleaning or organization
Running errands for neighbors or family friends
Car washing or detailing
Helping with yard sales
Snow shoveling or leaf raking
Photography or videography services
Music lessons or performances
Artwork or craft sales
Writing or editing services
Computer repair or tech support
Graphic design or website building
Event planning or decoration services
Food delivery or grocery shopping
Performing or teaching magic tricks
Personal shopping or styling
Bookkeeping or accounting services
Fitness training or coaching
Painting or mural services
Car or bike repair or maintenance
Farm or garden work
House painting or power washing
Running a concession stand at local events
Other than the above list, you could also employ your child to work in your business. A common way I have seen younger children around 11 or 12 years old earn income is to help run the business's social media content.
After Your Child Has The Ability To Earn $5,520 A Year, Open A Roth IRA For Them And Invest Monthly Into A Low-Cost Index Fund Such As VTSAX
You will need to setup the Roth IRA to have automatic monthly contributions into a low-cost index fund, such as VTI or VTSAX. If you invest $460 a month starting on you child's 10th birthday, they will have $58,428.93 (assuming an annual return of 7%) by the time they turn 18 years old.
These investments can come from you as a gift as well. In other words, your child could earn $5,520 a year, but all their Roth IRA contributions could come from you as a gift as long as the contributed amount did not exceed their earned income.
The key thing is to make sure throughout these years that your child is still earning at least $5,520 a year.
Now, The Beautiful Part
If you have kept your child in the loop, they should enjoy watching their dollars grow and will hopefully continue the habit of investing into their Roth IRA as they age.
But, if your child chooses to never contribute another dollar into their Roth IRA and never touches it, what will it look like when they turn 60?
Because of the foundation you set your child up with, if your child never touches their Roth IRA until their 60th birthday, the account will be worth $1,001,720.58 in today's value (assuming an annual return of 7% after subtracting 3% for inflation). Also, remember that this is tax-free!
If you use this method to save for your child's future, you do not have to stress so much about leaving an inheritance. You do have to stress about making sure you teach your child proper spending and saving habits though.
For this method to work, they have to understand the value of compound interest and why they should not touch this money until they turn at least 59 and 1/2 years old.
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