The Most Powerful Investment Account Ever Created
Plus, these young individuals have 50+ years of tax-free compounding ahead of them. If they make just one $6,000 contribution to a Roth IRA … compound at 7% for 50 years … their balance at retirement could be over $175,000. You and I may not be there to see it, but that’s one heck of an investment!
However, young adults do not have $6,000 of extra cash lying around to invest for retirement. That is why parents and grandparents need to gift it to them, and why this concept falls under this quarter’s Family Governance section.
Helping your young family members to create and fund a Roth IRA is one way to teach them about investing and to help grow their financial literacy. Roth IRAs establish an understanding of employment income, compounding growth, and taxes.
Roth IRAs can offer a little employment challenge, too. Tell your heirs that you will match their W-2 statement dollar-for-dollar as an incentive to work hard. They keep the earnings, you make the deposit. Roth IRA deposits are accepted until April 15 of the following year. There is even a Roth UTMA IRA for kids under 18.
We use these accounts to teach our clients’ kids about stewardship. We teach them that it is their money, their responsibility, but their parents provided it. If parents ever fall on hard times, this is money the children might use to support them. So far, this framing has worked: kids understand the stewardship concept.
Could the kids use the money for anything other than retirement? Sure. Educational expenses, first-time home purchases … various exceptions exist for tax-free distributions before age 59 ½. Consult a tax accountant for details.
Wealthy families may discount this idea because it is such a tiny share of their family’s total wealth. Do not let this prevent you from capitalizing on an opportunity to include your young heirs in the investment of family assets. The tax-free structure of Roth IRAs is an incredible bonus, and one that likely only the young adults in the family can capitalize on.