"Imagine: Your Child a Teenage Millionaire"
8/6/06
As parents we always strive to give our children advantages that we didn’t have when we were young. We try to make certain they get the best preparatory education possible; go to the best college that they can get in; have a nice home; and take them on great vacations. Generally, we try to make their lives better than what we experienced. How would you feel if you knew that you helped your child earn his or her first million dollars? It’s possible you know, and with much less effort than you might think.
One financial tool that your children have today that you did not have is the Roth IRA. With a Roth IRA, there is no tax deduction for contributions but earnings grow tax deferred. When you begin taking money out at retirement, your withdrawals are not subject to income tax (unlike a Traditional IRA). This is perfect for your teenage child because his or her low personal tax bracket means a tax deduction provides little benefit. However, when your children retire, having the ability to receive tax-free retirement account distributions will be very meaningful since their income tax bracket is likely to be much higher. The other key to the Roth IRA, as well as the Traditional IRA is tax-deferred growth. In order to contribute to a Roth for your child, he or she must have earned income. Contributions can equal 100% of earned income up to $4,000.
Here’s how to set in motion your child’s first million dollars. Agree to match your child’s summer earnings dollar-for-dollar up to $4,000. Your ‘matching’ gift will go into a Roth IRA in your child’s name. Take the funds and invest them in a low-cost stock mutual fund such as Vanguard Total Stock Market Index (www.vanguard.com symbol VTSMX). Over long periods of time, the stock market has earned an average annual return of 9% to 11%. Assuming you do this for the next four summers and have invested $16,000, your child’s account could exceed $1,000,000 by his or her age 65! It is true that a million dollars isn’t worth today what it used to be, but remember this is a small start. If your child continued investing $4,000 per year until he or she retired, his or her account could be worth more than $3 million! Add on top of that home ownership, 401k’s and voila, your child has become a multimillionaire with minimum effort!
An important lesson is the importance of starting early and saving consistently. This may be one of the best pieces of financial wisdom you can give your child. Most of you know this and many of you think to yourself, "If only I had starting saving earlier". If you would like to have a year-by-year chart showing how money could grow under this plan, email me at [email protected] or send me a self-addressed stamped envelope to