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One Powerful Financial Move for Kids (or Grand-kids)

Sly boy at the table with money

Turn $500/Year into $500,000!

I recently created Roth IRA’s for my kids and put $500 into each account. With a little guidance from me, the kids will each choose to become stock owners of one company. Going forward I will encourage them to save by matching what they contribute to the account and am hopeful they will save at least $250 per year to go with my $250 match.

Why bother?

Our Kids Long-Term Financial Outlook is not Rosy…

There are many forces today that will make it very difficult for young people to have anywhere near as much money or retirement income as this generation does.

Some of these include:

  • Social Security has virtually ZERO chance of being in place 40 years from now. A social security check for today’s retiree of $2,500/month has a lump sum value of over $500,000. Today’s kids will need to have that much more saved up to replace that.
  • I recently read that the first person to live to 150 years old is alive today.
  • Future retirees will live a lot longer and need a ton more money to maintain their lifestyle. New fact: A 10.4% life expectancy increase for 65-year-old men (compared with 2000), from 19.6 years to 21.6 years, and an 11.3% improvement for women, from 21.4 years to 23.8 years since SOA’s 2000 tables.  Today’s kids should plan on living past the century mark.
  • Student debt has created a hole that will take years for many young adults to dig out of before they can even fathom having a positive net worth
  • The job market has seldom been tougher for many college grads. It’s not easy to save money working part-time or for an hourly wage.

For all these reasons and more, today’s kids might not have it nearly as good financially as we do. If you want to help them get ahead financially, you might want to consider putting some money away for them.

One vehicle that is especially attractive is the Roth IRA.

I love that my teenagers have an investment account and will probably never, ever, have to pay tax while it grows or at distribution!

If your kids or grand-kids earn money or do jobs that you would pay others to do (reasonable wage) they are considered to have earned income. They can establish a Roth IRA and it can be funded dollar for dollar on their earned income up to $5,500 per year.

The money used to fund the Roth IRA can come from any source: the child, parent or grandparent. As a minor, the account would have a Custodian (usually parent) that would control the account at least until the child is 18. One potential drawback, the child can then take control of the account and money at age 18.

TIME VALUE OF MONEY?

$500 per year growing at 10% for 50 years= $500,000+

While in a Roth IRA, the growth is not taxed nor is it taxed at withdrawal after age 59 ½!!!

There are many other advantages of using the Roth IRA, (including that principal distributions are penalty-free). This link is very helpful with examples: Rules for Roth IRA withdrawals

Of course, planning for my own financial independence and my kids college costs come first.  You may also want to put a little money in these types of accounts for your children or grandchildren.

I think of it as a small advance on their inheritance and love the idea of them getting their feet wet with choosing and understanding investments in stocks. Your kids or grand-kids will likely be much better off if you fund Roth IRA’s for them rather than having them inherit money from you later in life.

What are you waiting for?

 

Related Sites/Posts:

IRS Site of Roth IRA

Take Advantage of Tax-free Roth IRA

 

2 thoughts on “One Powerful Financial Move for Kids (or Grand-kids)”

  1. Mike Pensinger says:

    Great advice, Brad. Getting our kids broad stock exposure now with maybe a 100 years of growth ahead of them is fantastic (if my kids only knew how well I’m setting up their financial future). My kids are too young for a Roth IRA because I think it’s hard to prove a 1 and 4 year old earned income, but I did set them up with UTMAs to start getting stock exposure. When my kids are older I’ll put them on the payroll and get them started with IRAs.

    My advice is to get your kids a portfolio of globally diversified stock and not put all their eggs in once basket with a single stock or a handful of stocks. I opened my kids’ UTMAs at Vanguard where I buy Vanguard Index ETFs commission free, plus I can get them large cap, small cap, international, and emerging markets exposure with 4 ETFs. It’s great, they get a $100 and if two ETFs are trading at $50 a piece I can literally buy 1 share of each for $50 and that’s it – I don’t have to buy a $50 ETF and pay $10 to do it (or 20% of my investment) – Vanguard makes it so easy and free to invest in this situation when a kid gets $50 or $100 at his birthday.

    1. Brad Rosley says:

      Thanks Mike, never loved UGMA’s as they work more against college loan qualification and kids are more likely to blow the money without the extra tax and penalty disincentives (ROTH).

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