Want to give your child or grandchild a jump-start on their retirement? How does a million-dollar tax-free account sound? Here’s a tip that will help them learn the value of investing and maximize the tax benefits.

The million-dollar tax-free idea

As soon as your child begins to earn income, open a Roth IRA and set a contribution goal to reach before they graduate from high school. Assuming an 8% expected rate of return, the investments made by age 19 will grow to forty times their value by the time they reach 67 (the current full retirement age). For example, investing $2,500 before graduation will increase to $100,000 by retirement. If you can bump that up to a $25,000 investment before graduation, at retirement it will be worth $1 million!

Compound interest occurs when interest is earned on the interest generated from the initial contribution. The more time the investment has to grow, the more exponential growth will occur. By starting to save before graduating from high school, the investment will have nearly fifty years of compounding growth.

Even better, while contributions to Roth IRAs must be after-tax contributions, any earnings are tax-free as long as the rules are followed! Simple to say, but how do you get $25,000 into a child’s Roth IRA? Here are some ideas.

How to jump-start their retirement

1. Hire your child. Roth IRA contributions are limited to the amount of income your child earns, so earned income is key. If you own a business or even make some money on the side, consider hiring your child to help with cleaning the office, filing, or other tasks they can handle.
2. Look for acceptable young-age work ideas. Babysitting, yard work, walking pets, shoveling, and lawn work are all good ideas to help your child earn an income at a younger age. Cash-based income can be more challenging to prove. Therefore, it is essential to keep track of it and consider filing a tax return, even if it’s not necessary.
3. Leverage high school years. Ages 15 through 18 are when your child will have their highest earning potential before graduation. Summer jobs, internships, and part-time jobs during the school year can provide a consistent income stream to contribute to a Roth IRA while also offering spending money.
4. Parent or grandparent matching idea. Your child’s income into the Roth IRA does not have to be directly from them. It simply sets the contribution limit. Make a deal that for every dollar your child saves for college, a parent or grandparent will contribute a matching amount to their Roth account. It can be a college and retirement savings in one!

By helping your child get a head start on saving, it should ease any anxiety regarding retirement and help them focus on school, starting their career, and other personal development goals. Contact our RRBB advisors if you have any questions.