Can my child open a retirement account? Well . . ., not exactly. But you can, as their custodian. If you child has earned income for the year, they can contribute the lesser of their earned income or $5,500 in 2018 to a tax-deferred retirement account (the limit is $6,000 in 2019).

By way of example, maybe your child earned money from babysitting, mowing lawns, or from a summer job; if so, they have earned income. This earned income now allows them to make contributions to a retirement plan. And since your child will probably be in a very low tax bracket currently, a Roth IRA is the perfect choice. Remember, with a Roth IRA, the money that goes in is taxed, but your distributions can be tax free if done right.

Let’s say that your child has accumulated about $25,000 in their Roth IRA retirement account by age 21. Well, since Roth IRAs are not subject to Required Minimum Distribution rules, your child will have amassed approximately $800,000 by the time their other accounts are requiring withdrawals (assuming a 7.2% annual return on your money). What makes this even more intoxicating is that your child need not have contributed another dime to their Roth IRA after age 21 to reach this $800,000.

Now, some estimates also show that a child starting at age 15 and contributing the maximum contribution each year to their IRA until age 70 would have amassed almost $3,500,000 (assuming a 7% annual return). Start that child a decade later at age 25 and they will only have roughly $1,700,000. Not bad, but not nearly $3,500,000 good.

For more ideas about how to help your children, read my post here about gifting a financial planning session.

If interested in starting a Roth IRA for your kids feel free to contact me at www.mynmfp.com/new-clients. For additional information about this topic, click on the title above.