It is tempting to open a savings account for your children and end the day. But if you want to create the next millionaire, your best bet would be to open a Roth IRA (individual retirement account). It is one of the hottest retirement accounts on the planet – giving you access to contribute after-tax dollars that will grow 100% tax-free. Simply put, if your child’s Roth IRA reaches $ 1 million, the entire $ 1 million will be theirs to keep when they reach 59 1/2 – no need to split the earnings with the IRS.
Before rushing to the nearest broker to open an account, however, make sure that your child really qualifies for a Roth IRA. Specifically, your child must have received an income during the year – working on a job, mowing the lawn or working at your company – to be eligible for this retirement treasure.
Image source: Getty Images.
Open a custody account
Most brokers do not allow minors to open a Roth IRA account on their own. Fortunately, many offer accounts in which parents maintain custody of the account, giving you full authority to manage the account’s assets and make decisions that are in the child’s best interests until they are legally able to control the account.
If you have no idea where to search for this account, you can start by researching the products of major brokerages, such as Fidelity’s Roth IRA for Kids. This account allows you to manage a Roth IRA for your children or another child in your family. Fidelity allows any adult to manage an account on behalf of a child who is earning money.
Contribute as much as possible
In 2021, the maximum that anyone under 50 can contribute to a Roth IRA is $ 6,000. But you can never contribute more than your income earns in the year. Therefore, if your child earned $ 3,000 as a nanny per year, you could contribute up to $ 3,000 to a Roth IRA on your child’s behalf.
Try to contribute as much money as possible to maximize the benefits. The more money you save on your Roth IRA, the more money you will have available to invest. But don’t feel pressured to contribute thousands of dollars each year. You can contribute $ 5 or $ 5,000 in any year, it’s up to you! But do not exceed the contribution limits or you will be subject to tax penalties.
Invest in high quality stocks
If you don’t select investments for your child’s Roth IRA, the money will stay there and you will lose big gains – especially during stock market highs. Make the most of the Roth IRA by investing in high quality companies with growth potential for a long period of time. This is the secret sauce to help your child become a millionaire before retirement.
There are thousands of stocks to choose from, so you want to pay attention to the company’s performance, management, trends and other factors that will help you determine a company’s potential for success. For example, investing in Apple it would have shown itself to be a successful investment opportunity that could easily have turned $ 1,000 into $ 500,000. Apple has experienced an impressive record of growth in the past decade – easily creating million dollar portfolios for individuals who have consistently maximized their Roth IRA accounts and invested – and the company is showing no sign of slowing down. It is also an action that pays dividends, so that children can be rewarded with an extra stream of income in their retirement account.
Starting early brings a lifetime of benefits
It is best to enjoy the exclusive benefits of the Roth IRA while your child is eligible. Think of the Roth IRA as a type of limited time offer account. Once someone’s income exceeds the limits, you can no longer make a direct contribution to the Roth IRA. If you have a hunch that your child will have a good income in the future, expose him to a Roth IRA now so he can benefit from the incredible tax-free benefits in retirement – an attractive feature that has become a big hit with investors. Another bonus: you can always withdraw what you contribute without worrying about taxes.
The Roth IRA can also serve as a safety net for your child if everything does not go as planned and if additional funds are needed. It can be used to finance your child’s education or buy a home. But the best rewards come when you are able to help your child build a Roth IRA in the long run – giving them access to earnings that can put them on one of the simplest ways to become millionaires.