Kids say the darndest things. They also do the darndest things, especially with their money. What a shame it is that the youngest people — who have the most to gain in the long term from savings and investing — are the least likely to have money to set aside for retirement. Well, that’s where you can come in as a parent.
Money can’t be contributed to kids retirement accounts unless they have actual income, but here’s the trick: it doesn’t have to be their money going into the account. If you have a little extra disposable money (we all do, right?) then you can open a Roth IRA and contribute up to the amount the child earns or $4,000, whichever is less.
You let your child keep his/her income and you contribute to their retirement. Better yet, teach your child why it’s so important to save for retirement and have them contribute with you. You might make use of matching to give them a financial incentive to contribute. Whether you do a 1:1 or a 10:1 match is up to you and your budget.
The nice part of the Roth is that your child will never pay tax on the money because the contributions are with after-tax money. The great part about getting the money in sooner rather than later is that your child will have those years (10-15 extra, if your child is anything like me) to let it compound.
Before going any further, let me say that you need to make sure that your own retirement is properly funded, or on pace to be properly funded. You have to come first because your retirement comes chronologically first. There will probably be more important places for you to put your money, so this suggestion may be a pipe dream, but it’s definitely something to think about.
If the investment portfolio is earning around 10% annually, 15 years is enough to allow the money to double two extra times. That might not seem like a lot until you think about some actual numbers. Doubling twice means retiring with $1,000,000 instead of $250,000; it’s that dramatic!
Because it’s late and I need to get to bed, I’ll only offer one page for your consideration: http://personal.fidelity.com/planning/retirement/saving/content/reasons.shtml. It’s amazing (but true) that each year your child misses contributing $3,000 to a retirement account could cost him/her $150,000+ by the time s/he retires. That’s an amazing — and amazingly scary — thought!