Opening a Roth IRA (individual retirement account) may be the last thing on your mind when your child starts making money. But early planning could come with many benefits, including a million-dollar retirement account.
A Roth IRA doesn’t guarantee your child will be rich in their senior years, but it can get them one step closer to financial security. The best part is that your child’s road to wealth can start with $500.
We’ll break down the steps you and your child need to take to jump-start your child’s million-dollar Roth IRA.
Sign your child up for the Roth IRA club
A parent or other adult can open and manage a custodial Roth IRA for a child as long as the child has earned income from work.
You or the child can stash away as much money as allowed using after-tax dollars. Later, your child can enjoy tax-free profits and income after they’ve turned 59 1/2.
There are limits to how much you can contribute to a child’s Roth IRA. For 2022, you can contribute a maximum of $6,000 if your child has earned at least that much during the year. If earnings are less, then you’re limited to the amount earned. These same limits apply to other savers under 50. Talk to your CPA to ensure you’re not contributing too much money to a Roth IRA if you want to avoid any problems down the line.
Building your child’s Roth IRA portfolio with $500
Make sure your child meets the income requirements, and then you’re free to start contributing money to the Roth IRA. Be intentional about your contributions if you want to help your child maximize the power of a Roth IRA. Instead of sporadically contributing money to the account, you can help your child set up a monthly contribution plan.
Let’s say your child plans to make $8,000 for the year. They’ll qualify to contribute up to $6,000 to a Roth IRA in 2022. The good part is that parents can fund the IRA, as long as the child meets the earnings requirements.
Here’s a sample contribution plan if you want to help your child max out their Roth IRA account for the year.
Step 1: Contribute $125 per week to the Roth IRA. If you want your kid to have some skin in the game, you could consider saving $100 and your kid can save $25 per week. That equals $400 per month from you and $100 per month from your child’s paycheck. You’ll hit $500 per month, which equals $6,000 after 12 months.
Step 2: Automate your plan. It’s easy to forget to perform this weekly task if you’re flooded with other responsibilities. It’s a good idea to set up recurring transactions from a checking account to a Roth IRA to ensure the money gets into the account.
Step 3: Create a watch list of stocks, and don’t forget to add companies to the list your child already knows about. This may make the process a bit more exciting for your kids. Do your research and select stocks with long-term growth potential.
Your child’s million-dollar Roth IRA
Let’s say your child starts their Roth IRA journey at age 16. A million-dollar Roth IRA is within reach before your child reaches full retirement age using these assumptions:
Annual contribution: $6,000 ($500 per month)
Investment rate of return: 8%
By the time your child turns 52, they could have around $1.03 million in the account. But your child can’t touch the earnings in the account until they reach 59 1/2 to avoid taxes and penalties.
The type of assets you invest in and how well they perform will determine how quickly your child makes it to the million-dollar mark. Typically, kids can take on more risk because they have a longer time horizon, so it wouldn’t be a bad idea to focus on stocks.
From $500 per month to a million-dollar Roth IRA
If you create a plan and work the plan, your child can be on their way to a seven-figure Roth IRA. It may take decades for your child to see the fruits of the Roth IRA, but planning ahead will increase your child’s chances of building a million-dollar Roth IRA. It’s even better knowing that you can turn $500 monthly contributions into a pot of money that’s 100% tax-free during retirement, so long as your child follows all the rules.
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