BY JULIA ANDERSON
Grandparents, especially these days, are looking for ways to help their kids and grandkids get ahead financially.
A simple way to give them a long-term financial boost is with a Roth Individual Retirement Account -- grandchildren especially. You can do this before they turn 18.
As we know, time is money. Money going into a Roth IRA for a kid, grows federally TAX-FREE until their retirement. For my 16-year-old grandson that will be 2069. A Roth IRA (for a child under age 18) can be opened and managed by an adult…parents, grandparents, even a friend of the family with a maximum $6,000-a-year contribution.
There’s one BIG CATCH: The money going into a Roth IRA for a kid under age 18 MUST BE EARNED INCOME. In other words, the kid must have a part-time job or be self-employed doing something like babysitting, dog-walking, yardwork, snow-shoveling or window washing. Income from these activities is “earned income” and can be verifiable.
As the grandparent, you can match this amount of earned income with a Roth IRA contribution. For example, if she/he generates earned income from a summer job totaling $800, you can put $800 in her/his Roth IRA custodial account. IRA contributions can not exceed a minor’s earnings. So, the earnings come first, then the IRA contribution. There is no minimum investment.
Why bother with what will likely be small contributions? Maximum contribution: $6,000 a year. But like I said, time is money. For example:
A $1,000 one-time contribution with reinvested earnings that grow an estimated 7 percent a year for 20 years will result in $3,870 in savings.
A $1,000 contribution every year for 20 years with reinvested earnings of 7 percent a year will grow to nearly $50,000.
A $2,000-a year-contribution over 20 years with 7 percent earnings results in about $95,000 in the Roth account.
Now, let’s double the timeline to 40 years.
$2,000 a year contribution over 40 years at 7 percent will generate a future balance of nearly $450,000.
The lesson here is that the more money you invest and the earlier you invest it adds up to a whopping increase in the end result after 40 years of saving and investing. The more money that goes in early, the better.
And when the grandchild starts withdrawing money at retirement, it will be TAX-FREE. They will have you to thank.
FYI: The current federal Roth IRA contribution limit per year is $6,000. Also, there are fewer penalties for withdrawing the money early, if needed for a down-payment on a house.
Where to invest the money?
At this young age and on into their early 40s, the money should be invested in aggressive dividend-producing stock funds because there will be time to make up for any market downturns as they age into their 50s and 60s. More time means more reinvested growth of the investment inside the account.
Investing is better than saving since reinvested dividends in stock accounts outperform any savings account by 10 times over in today's low-interest rate environment.
Best Reasons for a Roth IRA for your Grandkid
A tax-free or tax-deferred investment demonstrates the miracle of compound interest over time. A Roth IRA can be set up online with no commissions or account fees.There’s no age restriction but the child must have earned income.
A Roth IRA is more flexible than any other retirement account because contributions can be withdrawn at any time with no penalty and can be used for more than retirement. But the ultimate goal should be retirement.
At age 18, in some states 21, the child becomes the owner of the Roth IRA account. You can still help them make contributions.
Nerdwallet, "Why your kid needs a Roth IRA," click here.
Fidelity, "Roth IRAs for Kids," click here.
U.S. News, “How to Set up a Roth IRA for Your Child.” Click here.
Motley Fool, “Can You Open a Roth IRA for Your kids?” Click here.
Dave Ramsey. "How Teens Can Become Millionaires." click here.
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I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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