Roth IRAs for Your Child or Grandchild

More clients have reached out in the past few years to discuss opening a Roth IRA for their minor children or grandchildren. You might imagine that I love this idea. It’s a great way to teach multiple financial lessons all at once –

(1) saving a portion of your income

(2) the magic of compounding returns over a long time and

(3) the power of tax-free income.

One of the big reasons I love getting started a little early is just how big of an impact an extra decade or two of compounding can make. I’m now in my mid-30s, so I’m at the phase where many of my friends growing up are now married, have kids, have bought a home, and are starting to think about investing. I get investing questions from them all the time, and I love them! But many didn’t start investing until their late 20s.

Now consider if they had a parent or grandparent set up a Roth IRA when they started high school at 14 and had helped them save $10,000 by the time they left for college at 18. Then they stopped investing, went to college, got jobs, got married, bought a house, and started investing again at 30.

That original $10,000 would turn to $1.4mm by age 70, assuming a 10% rate of return, all tax-free because of the Roth IRA. However, if they waited until 30 to start, the $10,000 would “only” be about $450,000.

The difference is almost $1mm between the two! Those 12 years make all the difference. It’s never too late for any investor. The 30-year-old can easily make up for the difference by saving more. The same goes for a 40-year-old or 50-year-old. But there is a true magic to starting early that cant be accomplished any other way.

To open a Roth IRA, the child must have some earned income. They can contribute up to the amount they earned but no more than the annual limit of $7,000 (for 2024). If the child is under 18, they likely need to open a guardian Roth IRA with their parent, which can be converted to a regular Roth IRA when they become an adult.

If you have a young family member who is working, consider helping them start a Roth IRA—they will thank you!

Happy Planning,

Alex

This blog post is not advice. Please read disclaimers.

Previous
Previous

Is the Stock Market Really Efficient?

Next
Next

The Stock Market and Politics Since 1950