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Opening a Roth IRA (individual retirement account) for a child is one of the best-kept long-term wealth-building secrets in the retirement world. It can be a surefire way to help your kids build a million-dollar Roth IRA before retirement — so long as they don’t squander the money away when they take control of the account.
Are you ready to set your child up for success? Here’s what you can do in 2022 to help your child get closer to the million-dollar mark.
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Unlock the possibilities of a $1 million Roth IRA
The Roth IRA is a powerful investment tool that comes with many appetizing perks. The best part is that your kids aren’t exempt from the benefits.
Let’s say you decide to open a custodial Roth IRA for a child in 2022. This is possible because anyone can contribute to a Roth IRA, so long as they have earned income for the year. You’re allowed to contribute up to $6,000 to a child’s Roth IRA or 100% of the child’s earned income for 2022, whichever is less.
With a Roth IRA, you contribute after-tax dollars now in exchange for tax-free growth and withdrawals during retirement. If you set aside $6,000 for your 3-year-old daughter, who is fortunate enough to get that much earned income from acting gigs every month, your daughter’s account could be worth over $83,000 before your child turns 14 (assuming a 7% annual rate of return). By the time your daughter turns 41, her account balance could be worth more than $1 million if she continues to contribute $6,000 every year.
Patience is key to your child’s Roth IRA success. If your child waits until age 60 before they withdraw funds from the account, they could potentially have an account balance that’s nearly $4 million.
It all starts with millionaire habits
Becoming a Roth IRA millionaire isn’t a get-rich-quick strategy, and your kids probably won’t see their million-dollar treasure before they turn 18.
The trick is to use the Roth IRA as a tool to teach your child about the importance of saving, investing, and compounding as early as possible. If your child learns how to save and invest a portion of every dollar they earn, they can have a financially secure future that allows them to live life on their terms.
The Roth IRA can also teach your child valuable math skills that can take their success to the next level. Ask your child to calculate how much the account could be worth in 10, 20, 30, or 40 years with a 7% to 10% rate of return. Choose different contribution amounts to see how that can impact your child’s future nest egg. These numbers may motivate your child to keep up with contributions after they turn 18.
Your 2022 action plan
Contributing to a Roth IRA can get your kids to $1 million, but it’s best to get your kids involved early on. When they have skin in the game and learn the power of compounding, they’ll appreciate the power of the Roth IRA even more. You also probably won’t have to worry about them draining the account when they turn 18.
First, set Roth IRA goals with your child. Let’s say your child is 15 years old and aspires to build a million-dollar Roth IRA. Show them how contributing the maximum amount ($6,000) could get them to the finish line faster. Since tucking away $6,000 into an account for the future may not be as appealing as buying the latest gadgets, show your child the potential value of their portfolio over time and how to break down their goal into bite-sized pieces.
Then, expose your child to the various investment options, including growth stocks, dividend-paying companies, and index funds. Get your child comfortable with selecting investments and developing an investment thesis so they won’t be tempted to sell investments when a market downturn happens.
Your child’s million-dollar Roth IRA
The Roth IRA can be a great companion on your child’s wealth-building journey. If your child waits until 59 1/2 to pull money out of their Roth IRA, every dime in the account will be 100% tax-free. Imagine your child with a million-dollar nest egg that they don’t have to split with the IRS.
Positioning your child for millionaire status may be easier than you think, so long as your child is willing to let time work in their favor. Set your child up with a millionaire mindset, and the Roth IRA will be only one of many accounts where they comfortably house their million-dollar treasures.
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