Help Future Generations Build Wealth Tax-Free
Most new investors know that a Roth IRA can be one of the greatest tools in your investing arsenal. By contributing after-tax dollars to it, you are allowed to grow the money tax-free. There are no taxes owed on any investment gains. There are no taxes owed on the withdrawals once you reach retirement age. It’s a fantastic deal.
If you want to help your child supercharge their own wealth building, one way you can do it is by opening a Roth IRA for kids. If your child earns any money at all, whether it’s from mowing the lawn, working at McDonald’s, or appearing in commercials, they are eligible for a kids Roth IRA.
Under 2018 tax rules, the maximum annual contribution into a Roth IRA is $5,500, or about $458 a month. If you are able to meet this maximum and teach your kids to contribute to it as they get older, the Roth IRA can be an enormously powerful way to make a lot of money for retirement.
The Major Advantage of a Roth IRA for Kids Is Time
Why would anyone bother opening a Roth IRA for kids? Time. Specifically, the power of compounding. In essence, the longer you allow investments to grow, the larger they will become. Imagine starting to fund a kids Roth IRA when they get their first job at age 16. If they continue to contribute until they retire at age 65, that’s a whopping 49 years of growth.
By the time your kid reached retirement age, or 65 years old, a Roth IRA with $458 monthly contribution would have more than $3 million in it if you assume an annual return of 8%. If you re-invest the dividends, you’d have exponentially more.