Your Kids Can Retire with Millions If you Set Up a Roth IRA Today
If you would like to be sure that taxes won’t dilute the results of your child’s investments, make those investments within a Roth IRA. And, as we’ve explained, the sooner you start the better.
But where does a child get money to invest?
You might consider hiring your child or grandchild. His or her earnings can be used to fund a Roth IRA. Not only will this be the foundation for his or her future wealth, it can also have immediate tax advantages for you and or your family member. The premise of our suggestion is simple. Assuming you have a business, money you pay the youngster reduces your business income and thereby your income taxes. And if you don’t have a business, the child can still fund the Roth IRA with his earnings. The child will owe little or no tax, which you can pay, while fully funding the Roth IRA.
What can your child do to earn money?
You might consider hiring your child or grandchild to do work around the house, or, any business or a professional practice. You’ll not only cut your own taxes today, but you’ll set the kid on a path that could lead to a multi-million-dollar retirement fund down the road. Click here for jobs your child might qualify to perform.
Tax Advantages
There are other tax advantages for hiring your children. For instance, wages paid to a child under 18 years of age who works for his or her parents are not subject to Social Security and Medicare taxes. And children under age 21 are not subject to federal unemployment tax. And hiring your children can deliver more than tax savings and substantial long-term wealth. At an early age, your youngsters can get an idea of what it means to work for money. They can learn values such as being on time, cooperating with other employees, and taking pride in accomplishing the tasks that they’ve been asked to perform. Your child will be getting more from the exercise than just a Roth IRA. Helping your children to become intelligent investors can also prove worthwhile to help them afford a college education.
That brings me to another important consideration: A Roth IRA will not affect the child’s ability to apply for financial aid for college. Unlike assets held directly in his or her name, assets held in a retirement account will not affect financial assistance for college (withdrawals from a Roth IRA can be made without penalty for secondary education).
Under current law, anyone with earned income can have a Roth IRA, even a child. Roth IRA’s as with all RIA’s grow tax free for as long as the money stays in the Roth Account. Roth IRA’s have the additional advantage that even when the money is paid out during your retirement, the distributions are made on a tax-free basis. For those with regular IRA’s, distributions are taxed as normal income in the year they are distributed.
Miracle of Compounding Creates Multi-Million Dollar Wealth
And hiring your children can deliver more than tax savings and substantial long-term wealth. At an early age, your youngsters can get an idea of what it means to work for money. They can learn values such as being on time, cooperating with other employees, and taking pride in accomplishing the tasks that they’ve been asked to perform. Your child will be getting more from the exercise than just a Roth IRA. Helping your children to become intelligent investors can be at least as worthwhile as the money you’ll ultimately spend to send them to college! That brings me to another important consideration: Unlike assets held directly in his or her name, assets held in a retirement account will not affect your child’s ability to obtain financial assistance to pay for college (even though some withdrawals from a Roth IRA can be made without penalty to pay for secondary education).
The same process can be established using no-fee DRIPs. The effect of compounding will be the same, but, unless the company accepts investments registered in the name of the Roth IRA (and there are very few that do) the dividends thrown off by the companies will be taxable annually at the child’s rate and eventually the gains will be taxed, but at favorable rates.
Suppose that you hire your child. If he earns at least $6,000, a year, that much could be invested in his Roth IRA. If he works for your business for, say, 10 years and your business make no further payments to him after that, he would have contributed a total of $60,000 to his Roth IRA.
How much that investment would be worth when he retires depends on the rate of return during that period and the number of years to retirement. To get an idea we built models to calculate returns 6%, 8%, and 10%.
Are these returns realistic? According to the Index Fund Advisors, from 1928 until 6/30/2020 investment in large-cap company stocks obtained an average annual return of 9.62%.
Using our three models, we figured that after 10 years, the total investment of $60,000 would be worth $107,451 at 6%, $129,535 at 8%, and $155,624 at 10%.
Keep in mind that the full $60,000 was invested for only half the time (the first year only $6,000 was invested and in the second, only $12,000, etc., so on average only $30,000 was invested for the full ten- year period.) But, most important, those first 10 year’s results are just to get the wheels rolling!
Let’s assume an 8% average annual return inside the Roth IRA: that initial $60,000 would be worth about $2,761,200 after another 50 years, and if the average annual return were to be 10% per year, that figure would be more than $7,000,000. And even at an annual average rate of return of only 6%, that initial $6,000 ($60,000 over the 10-year period), will magically turn into about $1,105,200. That’s the (almost incredible) power of compounding!
Again, how reasonable are these calculations? For the past 10 years, as of 6/30/20, the fund we manage for our subscribers and others, the MP63 Fund (DRIPX), provided an average annual return of 11.76% and for the past five years, our average annual return was 8.37%. (For the same periods, the S&P returned 13.98% and 10.72%, respectively.)
Of course, there are bad years. For example, during the seven down years between 2000 and 2018 (2000, 2001, 2002, 2008, 2011, 2015, 2018) including the reinvestment of dividends, the S&P Index lost an average of 11.57% while DRIPX lost 7.06%%. During the past 50 years, the year with the greatest loss was 2008, during the financial crisis, with the S&P dropping 37.00% and a drop of 31.11% for DRIPX.
Keep in mind that the multi-million-dollar portfolio we calculated was achieved without any further investments after the first 10-year period. And if your child were able to continue to fund his or her Roth IRA account, the tax-free Roth IRA buildup, based on our assumptions, would be even more overwhelming.
The effect of compounding will be the same, but, unless the company accepts investments registered in the name of the Roth IRA (and there are very few that do) the dividends thrown off by the companies will be taxable annually at the child’s rate and eventually the gains will be taxed, but at favorable rates.