How to Help your Kids be Tax-Free Millionaires
Who wouldn’t want to be a millionaire, right? We are all doing our best with our money to be smart and build the best financial future for ourselves and our family. What if, by setting up a solid foundation, you can build the best financial future for your child as well? Following a simple process, you can ensure your child can easily retire as a tax-free millionaire when they are of retirement age. Let me walk you through how:
1. Open a Custodial Roth IRA and have them deposit $100/month
When your child is working age and gets their first job out of the house, open a custodial Roth IRA account for them. The greatest financial lesson you can teach your child is to learn to save (and I recommend teaching that early on!). Armed with the IRA account, have your child deposit $100 per month into the custodial account and invest their money in broad-based index funds to help that sum grow.
2. Continue that $100/month investment for 20 years
One hundred dollars over the course of a month (especially early on when there aren’t really any bills to have to worry about) should not be an overburden for them and is a great starter for them to get accustomed to squirreling away a portion of their paycheck. Be sure to have them continue with that $100 investment for the next 20 years.
3. Increase investment to $250/month
After 20 years, your child is probably somewhere in their 30’s, and (hopefully) making a bit more money than their first job bagging groceries as a teenager. Now that they have a bit more coming in, tell them to increase their investment strategy to $250 per month into that IRA account. Those Index Funds your child has been adding into each month should be hard at work making that money grow. Over the past 30 years, the S&P 500 index has demonstrated a compound average annual growth rate of 10.7% per year. So even though your child has only been contributing $1,200 per year, the account balance should already show a significant increase (likely somewhere around $60,000). Have them continue the new investments of $250/month until retirement age.
4. Congrats, your child is a millionaire!
At the retirement age of 65 years old, your child’s Roth IRA account has likely accumulated to one million dollars! In addition to any other savings your child has done, they should be in a fantastic position financially to embark on whatever retirement they want.
Past your child simply being in a strong financial situation, there are a couple of benefits to executing this strategy. One additional benefit to this strategy is that, because this account is a Roth IRA, your child won’t have to pay taxes on the money they take out of their account. The money in the account is theirs to use (once they hit retirement age). Additionally, $10k of this account can be used towards your child’s first home. Without a ton of struggle or pain, you are already planting a seed for their first down payment to make homeownership a reality for them in the future. So many wins!
Happy saving, all! May all our children be Millionaires!
