Financial Fellow

Written by J.P. Wicklein

          By setting up a custodial IRA for your teenager, and contributing to it regularly until they graduate college, you can make your kid a millionaire.  Here are the details:

Step 1:  Get your kid a job

     To contribute to a custodial IRA a child needs to have “earned income” – either through a W-2 or self-employment.  Put every penny they earn, up to the $5,000 cap, into a custodial IRA.  Technically you can allow them to keep the money they earn and use your own money to invest in their IRA.  (The IRS only requires that any annual IRA contributions don’t exceed your child’s earned income.) 

Step 2:  Invest your kid’s earnings in a custodial IRA

     Let’s assume your child earns $5,000 a year through part-time and seasonal work from ages 15 to 22.  If you invest their earnings in a well diversified portfolio of 100% stocks, that earns an average of 7% annually, they would have $52,000 by the time they graduate college at age 22. 

Step 3:  Don’t take any money out 

     If your child never touches their IRA after graduation, either to withdrawal funds or make further contributions, their $52,000 would grow to a whopping $1,000,000 by the time they retire at age 65.  Not a bad return on the $40,000 they earned working a part-time job. 

It gets better

     It’s amazing how $40,000 can become $1,000,000 through the power of compounding interest.  The more time their money has to compound, the more they’ll wind up with.  Which brings me to the title of a follow-up article on Financial Fellow, “How to Make Your 5 Year Old a Multi-Millionaire”.  I’ll be posting that article shortly so be sure to check in from time to time.  Or, you can subscribe to Financial Fellow and receive the article via email – it’s free. 

Photo by:  orangeacid