When our babies are born, it can be hard to picture them walking and talking, let alone becoming productive members of society and retiring someday. But by taking advantage of a popular savings vehicle known as the Roth IRA as early as possible, you could set your child up for a rich retirement.
Unlike a traditional IRA, contributions to a Roth don’t earn a tax deduction, but the account’s earnings will compound tax-deferred and be available for tax-free withdrawals when your child retires in, let’s say, 2075.
Meanwhile, contributions to the account (but not the earnings) can be withdrawn at any time without taxes. That can make a Roth IRA a good way to put money aside for other goals, such as college, a wedding or a down payment on a home.
There’s a catch, of course. A Roth can be funded only with earned income, so you can’t simply give a kid the cash.
Unless your baby lands a gig as a professional model or actor, it’s unlikely that he or she will be bringing home a paycheck before kindergarten. But it’s very possible for a child not much older than that to earn some money doing the kinds of work that kids have always done: baby-sitting, dog walking, lawn chores and so forth.
If you happen to have a business of your own, that opens up a whole new set of possibilities, says Kimberly Foss, a CFP professional in Roseville, California, and author of the book “Wealthy by Design.”
Foss, who set up Roth IRAs for 2 of her own children, says the key is that the job and the hours be appropriate for someone of that age. For example, she put her 5-year-old son to work shredding papers at her firm, she says, and a few years later promoted him to doing some basic filing.
Foss also used the opportunity as a “teachable moment,” giving her kids a head start in understanding what a mutual fund is and how the markets work.
You can open a custodial Roth IRA account, with you as custodian and your child as the account holder, at many brokerage firms, mutual fund firms and other financial institutions. Minimum investments vary, so you might need to shop around.
When the child is no longer a minor (often age 18 or 21, depending on the state), the money becomes his or hers to control — something to keep in mind in case your adorable little bundle of joy grows up to be a surly teenager or young adult.
Nah, that could never happen …
Another nice thing about Roth IRAs: Under current rules, the money doesn’t have to be withdrawn during the owner’s lifetime. So if your child has other resources to pay for retirement, the Roth could be passed on to the next generation, making your grandchildren not just rich, but very rich.