It is tempting to open a savings account for your children and call it a day. But if you want to create the next millionaire, it would be best to open a Roth IRA (individual retirement account). This is one of the hottest retirement accounts on the planet – it gives you access to post-tax contributions that will grow 100% tax-free. Simply put, if your child’s Roth IRA reaches $ 1 million, the entire $ 1 million is theirs to keep once they reach 59 1/2 – no need to share the profits with the IRS.
Before running to the nearest broker to open an account, make sure your child actually meets the requirements for a Roth IRA. In particular, your child must have earned income for the year – from work to work, mowing the lawn or working in your business ̵
Open a trust account
Most brokerage firms do not allow minors to open a Roth IRA account on their own. Fortunately, many offer accounts in which the parent retains custody of the account, giving you full authority to manage the account’s assets and make decisions that are in the best interests of the child while they can legally control the account.
If you have no idea where to look for such an account, you can start by researching products from leading brokerage firms such as Fidelity’s Roth IRA for Kids. This account allows you to manage a Roth IRA for your children or another child in your family. Fidelity allows any adult to manage an account on behalf of a child who earns money.
Contribute as much as possible
In 2021, the maximum anyone up to the age of 50 can contribute to a Roth IRA is $ 6,000. But you are never able to contribute more than the earned income for the year. So, if your child has done babysitting for $ 3,000 a year, you can deposit up to $ 3,000 for a Roth IRA on behalf of the child.
Strive to contribute as much money as possible to maximize the benefits. The more money you save in your Roth IRA, the more money you have available to invest. But don’t feel pressured to deposit thousands of dollars every year. You can deposit $ 5 or $ 5000 each year, it’s up to you! But do not exceed the contribution limits, otherwise you will be caught by the tax sanctions.
Invest in high quality stocks
If you don’t choose to invest in your child’s Roth IRA, the money will sit there and you will miss out on big profits over time – especially during the peak of the stock market. Take full advantage of the Roth IRA by investing in the highest quality companies that have the potential to grow over a long period of time. This is the secret sauce that helps your child become a millionaire before retirement.
There are thousands of stocks to choose from, so you want to pay attention to the company’s performance, management, trends and other factors that will help you determine the company’s success potential. For example, investing in Apple it would be a successful investment opportunity that could easily turn $ 1,000 into $ 500,000. Apple has experienced an impressive growth record over the past decade – easily creating a portfolio of millions of dollars for individuals who are constantly increasing their Roth IRA accounts and investing – and the company shows no signs of slowing down. It is also a share that pays dividends so that children can be rewarded with an additional income stream into their retirement account.
Getting started early comes with lifelong benefits
It is best to take advantage of the unique benefits of Roth IRA while your child is eligible. Think of Roth IRA as a time-limited account type. Once someone’s income exceeds the limits, you can no longer make a direct contribution to Roth’s IRA. If you suspect that your child will win in the future, expose them to the Roth IRA now so they can take advantage of the incredible tax breaks on retirement – an attractive feature that has become a huge hit among investors. Another bonus: You can always withdraw what you contribute without worrying about taxes.
Roth IRA can also serve as a safety net for your child if everything does not go according to plan and additional funds are needed. It can be used to fund your child’s education or to buy a home. But the best rewards come when you can help your child build a Roth IRA in the long run – by giving them access to income that can put them on one of the easiest paths to becoming a millionaire.