This ‘quick tip’ is probably only applicable to about 1% of our readers right now, but if you’re like me then hopefully this will strike you as such amazing information that you’ll store it away somewhere and think about it when you have a child who is about 13 years-old:
Anyone who has ‘earned income’ in a calendar year is eligible to contribute to a Roth-IRA and this includes children (I’ve heard of this as young as 13 years-old). As many of you know, compound interest is one of the most powerful concepts on earth, and nowhere is it more vivid than in this chart:
| Age | Invested | 9% Return | 8% Return |
|---|---|---|---|
| 13 | 5,500 | 315,797 | 204,776 |
| 14 | 5,500 | 289,722 | 189,607 |
| 15 | 5,500 | 265,800 | 175,562 |
| 16 | 5,500 | 243,853 | 162,558 |
| 17 | 5,500 | 223,719 | 150,517 |
| 18 | 5,500 | 205,246 | 139,367 |
| 19 | 5,500 | 188,299 | 129,044 |
| 20 | 5,500 | 172,752 | 119,485 |
| 21 | 5,500 | 158,488 | 110,634 |
| 22 | 5,500 | 145,402 | 102,439 |
| Total: | 55,000 | 2,209,078 | 1,483,989 |
As you can see, if a person contributes the current maximum of $5,500 each year from the time they turn 13 to the time they turn 21, at a 9% annual growth rate, it will be over $2.2 million at age 60 when they are eligible to withdraw it from your Roth-IRA (59.5 is the earliest standard withdrawal age).
Additional Benefits: Fees and Taxes
(Incidentally, this chart should show you just how important it is to keep your expenses down when investing! The 1% difference each year compounds to over a $700,000 difference when age 60 rolls around. Many people don’t think twice about paying “financial advisers” 1% or 1.5% of their assets each year, since it sounds like a small number, but this shows just how important it is. Invest in low cost mutual funds and ETFs and you’ll beat those advisers 99 times out of 100)
Unlike a 401k or a traditional IRA, the Roth-IRA withdrawals are completely tax free, so 100% of it is theirs to keep!
Think about that for a second: if you put $5,500 in annually from age 13 through when you graduated college, you would never have to save another dollar for retirement as it would already be done!
Most kids don’t have an extra $5,500 lying around each year, and even if they did, I’m not sure a Roth-IRA would be their money destination of choice. That said, parents, grandparents, relatives, etc. are able to contribute for them, as long as the contribution is below the amount of earned income the child had that calendar year (including babysitting, lawn mowing, etc., which is reported on their tax return).
So if you want to ensure your kids (and in turn your grandkids) will be rich one day, a Roth-IRA at a very young age can be an amazing way to go about it!
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