Want to know what is the most impactful gift you can give your child? A Roth IRA when they are young! Before I get into specifics, let me give you a little background. I’ve been volunteering as a Junior Achievement teacher at Fort Collins High School for over a year now educating children on various financial topics. I work mainly with juniors and a large majority of them have either part time jobs or work during the summer. For those kids that are working, they may be eligible to contribute to a Roth IRA. A Roth IRA is a long term account meant for retirement as you take withdrawals past age 59 1/2. However, you can take out withdrawals prior for things like a first time home purchase or to pay for education costs, if you are careful to follow IRS rules. To learn more about all the distribution options and taxes, you can visit www.irs.gov and read Publication 590 . The big advantage of the Roth IRA is that growth is all tax free. So withdrawals past age 59 1/2 are all tax free!
So let’s take your typical 16 year old working part-time and making money. From my personal experience, the 16 year old pretty much spends all the money they take in and sometimes more!! Now what if you told your 16 year old, “If you put away $1,000 in this Roth IRA investment, I’ll double it and put in $1,000 too”. Their next question will most likely be, “What’s a Roth IRA and what will do for me?” Here is where I’ll help you out and you can show them the following table:
| Age | Savings | Parent | Hypothetical Growth Rate Based on Long Term US Stock Market* | Value |
| 16 | $ 1,000 | $ 1,000 | 9% | $ 2,000 |
| 17 | $ 1,000 | $ 1,000 | 9% | $ 4,360 |
| 18 | $ 1,000 | $ 1,000 | 9% | $ 6,932 |
| 19 | $ 1,000 | $ 1,000 | 9% | $ 9,736 |
| 20 | $ 1,000 | $ 1,000 | 9% | $ 12,793 |
| 21 | $ 1,000 | $ 1,000 | 9% | $ 16,124 |
| 22 | $ 1,000 | $ 1,000 | 9% | $ 19,755 |
| 23 | $ – | $ – | 9% | $ 21,533 |
| 24 | $ – | $ – | 9% | $ 23,471 |
| 25 | $ – | $ – | 9% | $ 25,583 |
| 26 | $ – | $ – | 9% | $ 27,886 |
| 27 | $ – | $ – | 9% | $ 30,396 |
| 28 | $ – | $ – | 9% | $ 33,131 |
| 29 | $ – | $ – | 9% | $ 36,113 |
| 30 | $ – | $ – | 9% | $ 39,363 |
| 31 | $ – | $ – | 9% | $ 42,906 |
| 32 | $ – | $ – | 9% | $ 46,767 |
| 33 | $ – | $ – | 9% | $ 50,977 |
| 34 | $ – | $ – | 9% | $ 55,564 |
| 35 | $ – | $ – | 9% | $ 60,565 |
| 36 | $ – | $ – | 9% | $ 66,016 |
| 37 | $ – | $ – | 9% | $ 71,957 |
| 38 | $ – | $ – | 9% | $ 78,434 |
| 39 | $ – | $ – | 9% | $ 85,493 |
| 40 | $ – | $ – | 9% | $ 93,187 |
| 41 | $ – | $ – | 9% | $ 101,574 |
| 42 | $ – | $ – | 9% | $ 110,716 |
| 43 | $ – | $ – | 9% | $ 120,680 |
| 44 | $ – | $ – | 9% | $ 131,541 |
| 45 | $ – | $ – | 9% | $ 143,380 |
| 46 | $ – | $ – | 9% | $ 156,284 |
| 47 | $ – | $ – | 9% | $ 170,350 |
| 48 | $ – | $ – | 9% | $ 185,681 |
| 49 | $ – | $ – | 9% | $ 202,392 |
| 50 | $ – | $ – | 9% | $ 220,608 |
| 51 | $ – | $ – | 9% | $ 240,462 |
| 52 | $ – | $ – | 9% | $ 262,104 |
| 53 | $ – | $ – | 9% | $ 285,693 |
| 54 | $ – | $ – | 9% | $ 311,406 |
| 55 | $ – | $ – | 9% | $ 339,432 |
| 56 | $ – | $ – | 9% | $ 369,981 |
| 57 | $ – | $ – | 9% | $ 403,279 |
| 58 | $ – | $ – | 9% | $ 439,574 |
| 59 | $ – | $ – | 9% | $ 479,136 |
| 60 | $ – | $ – | 9% | $ 522,258 |
*Past performance is no guarantee of future results and 9% does not represent any specific investment
You can tell them, “Look at this. If you just save $1,000 a year into this until you finish college for a total of $7,000 and I match you, you could have $522,258 tax free for your retirement!” Now this may not work initially, but at least it starts a discussion going about saving money and how compound interest is so powerful. Also, if they start to do this, it sets a good habit of saving. My experience has been that once people see how fast a little bit of savings can grow, they want to do more. In fact, if I tweak the table above and assume the kid continues to put in just $1,000 a year (maximum $5,500 right now) until age 60, the final figure is $830,325. And all the kid saved was $45,000 to get it!!
So if you have older children who are about to start work or already working, I urge you to consider having this discussion with them as it is truly is the most impactful gift you can give your child. It teaches them that saving is important, that saving a little now means a lot later (compound interest), and it puts them into a habit of saving that hopefully grows and continues in their lifetime. And if they say yes to it, then contact me to get a Roth IRA setup!