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It’s Holiday Time (Almost) How About a Roth IRA?

Money in handI recently read an article about the value of giving your children (or grandchildren) the gift of compound interest and a more secure retirement, in the form of an annual contribution to their Roth IRA. What a great idea!

The author’s point is that many young people are struggling to pay off their educational debt and mortgages, or cope with the costs of child-care. But that, of course, is the best time to start saving money towards retirement, since money invested early has more time to grow.  Studies recommend saving between 15% and 17% of your earnings each year towards retirement — but many young people just can’t save anywhere near that amount at the beginning of their careers.

His solution: consider giving children and grandchildren a gift of $5500/year for deposit into a Roth IRA.

There are a few requirements:

  • The child must establish the Roth IRA themselves.
  • The child (or that child’s spouse) must have earned income.
  • The child’s income must be less than $114,000 or if married the combined income must be less than $181,000.

The Roth IRA can grow, tax-free, as long as it’s not withdrawn before age 59 1/2 (or if its withdrawn due to death or disability).  And the combination of tax-free compounding interest and time is a powerful one: If a contribution of $5,500 is made for 10 years, while a child is between the ages of 23 and 32, and grows at 6% a year, when that child reaches age 67, that account would hold $590,630.

Now that’s a gift worth giving.