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.