Fidelity reported that 391,562 IRA customers had a million-dollar IRA at the end of 2023. You can increase your child's chances of reaching this milestone by starting their journey now. The great thing about a Roth IRA is that anyone can contribute to the account, whether they are 17 years old or 77 years old, as long as they have earned income for the year and it doesn't exceed the annual threshold.
If you're looking for the secret to building a million-dollar Roth IRA for your child from scratch, I've jotted down a few pointers below.
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1. Start early and do your research
While you're likely juggling multiple activities for your kids, it's never too early to plant seeds for their financial success. Opening a custodial Roth IRA for your child now can teach valuable skills about saving and investing, which they can use when they gain exposure to other accounts like a 401(K) when they start working.
Before you get the ball rolling, here are a few things to consider:
- Review the qualifications: Your child must have earned income from a job or business. Dividend, interest, and other forms of unearned income won't count. Proving your child's earned income can be tricky in certain situations, so you'll want to consult a certified public accountant or other financial professional to make sure you're following all the rules.
- Compare different accounts: Check out the pros and cons of Roth IRAs at different financial institutions so you know what you're signing up for. Some accounts may come with account maintenance and other fees that could reduce your child's account balance.
- Open an account: Most financial institutions will require an adult to open a custodial Roth IRA and manage the account on your child's behalf until they are legally able to do so on their own.
By starting early, you can create a game plan for success that increases the odds of them building a million-dollar retirement.
2. Maximize your child's contribution power every year
Contributing to a Roth IRA for your child is a big deal because they are able to contribute after-tax dollars now -- while typically in a lower tax bracket-- in exchange for tax-free income later. Once they turn 59 1/2, all the money in the account is 100% tax free.
For 2024, you can contribute up to $7,000 to your child's Roth IRA. However, if your child earned less than this amount, their contribution is limited to their earned income for the year. For example, if your child earned $5,000 from a summer internship in 2024, your contribution would be capped at $5,000 for the year.
You're not required to max out your child's account every year, but contributing as much as you can will give your child more money to invest. Investing is key to turning $7,000 in annual contributions into a million-dollar portfolio.
For example, if you start contributing to your child's Roth IRA when they are 12 years old and they earn an average annual return of around 10%, which is in line with historical averages, they could reach the million-dollar Roth IRA mark before retirement.
3. Get your child involved in the process
Helping your child max out their Roth IRA might sound like a lofty goal on top of all your other bills and responsibilities. However, saving small amounts every week can make a huge difference. Also, ensure your child contributes to the account to give them a sense of ownership. The more they are involved now, the more likely they are to continue following the game plan when they manage the account.
First, determine how much each of you should contribute. For example, if your child earns $8,000 this year, you might encourage them to contribute $3,500 of their earnings while you contribute the remaining $3,500 to help max out the account. Then, teach them to calculate how much they need to save to meet their goal by the deadline.
If your child has 12 months to contribute $3,500 to a Roth IRA, they would need to save about $292 every month. This breaks down to less than $70 a week for 52 weeks, or roughly $10 a day. If this sounds ambitious, remember you don't have to contribute all the money by the end of the year; you have until the tax-filing deadline to make contributions for the prior year.
Now is a good time to set your child up for success so you won't have any regrets later. Starting early and getting your child involved will help them develop habits that can prepare them for a financially secure future.
