Roth IRAs make excellent savings vehicles for your children and/or grandchildren! Your child or grandchild, regardless of age, can contribute to a Roth IRA, as long as they have earned income from an outside employer, or from your own business. If you have a business, you may be able to employ your children or grandchildren and gain some tax advantages – while saving for their future. Paying your child or family member as an employee is completely legal and the child labor laws do not apply as long as they are your child. There are many benefits these tax-advantaged investment vehicles offer, such as:

  • They provide your child/grandchild a head start on saving for their retirement.
  • They teach your child/grandchild valuable financial lessons.
  • They give your child/grandchild an introduction to investing.
  • They provide a platform to teach your child/grandchild about money and the relationship between earning, saving, and spending.
  • They teach your child/grandchild the lesson of compounding interest, which works best if it has the longest amount of time to work. At their young age, compounding kicks into high gear due to the long-time horizon. Even relatively small IRA contributions can grow significantly over time.
    • ASSUMING A 10% RATE OF RETURN:
      • For example, even a single $3,000 IRA contribution made at age 13, for example, could grow to $25,461 by the time the child (or grandchild) turns 18 years old, at a 10% annual return rate. By the time they retire at age 65, for example, this could grow to $5,123,158 (see chart below)!
      • Or, for example, a single $6,000 IRA contribution made at age 13, for example, could grow to $50,923 by the time the child (or grandchild) turns 18 years old, at a 10% annual return rate. By the time they retire at age 65, for example, this could grow to $10,246,316 (see chart below)!
      • These are real, achievable outcomes!

Young people have a tremendous advantage when it comes to investing. However, there are certain rules to this, so it needs to be done the right way. If you would like help on how to properly set up and make contributions to a Roth IRA for your children or grandchildren, Katherine Johnson, a Georgetown-based CPA, and our firm’s personal tax planner, would be thrilled to answer any questions you may have! Contact her office today at (502) 867-1827 or katherine@kmjohnsoncpa.com.

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