Parents often open savings accounts for their children. Few think of starting a retirement account for a 10-year-old.
The idea isn’t so farfetched.
Any parent, grandparent, aunt, uncle or family friend can open a Roth individual retirement account to help a child invest for the future.
Think money from tutoring, babysitting, mowing lawns or even raking leaves and shoveling snow.
“It’s a great way to give kids a big head start on saving for retirement — and an opportunity for them to learn valuable lessons about saving and investing” said Stuart Ritter, a senior financial planner at T. Rowe Price.
Like a regular Roth IRA, the minor must have earned income to be eligible, and the contribution amount cannot exceed the earnings in a given year. For example, if your child earned $1,000 as a camp counselor last summer and that’s the only job they held for the year, then that $1,000 is the most that can be contributed to the account.
The maximum contribution for 2018 is $5,500 but that will rise to $6,000 in 2019. It doesn’t have to be in the form of a paycheck, either. Cash is fine as long as it’s been documented.
Consider this: If an 18-year-old contributed the maximum 2018 amount of $5,500 for one year, then the 2019 maximum amount of $6,000 for the next three years, they could have more than $500,000 when they reach age 65 (assuming a 7 percent annual growth rate and no additional contributions after age 21).
If they continued to contribute every year, your teen could have a nest egg of over $2.4 million by the time they’re at retirement, according to an analysis by Fidelity.