Wednesday, June 2, 2010

Think Roth IRA Now -- For Your Child's Future

In these current turbulent economic times, you really have to think outside of the box to get ahead financially. This may take some creativity on your part to pull off, but I can help give you some ideas and it will be well worth it in the end. One of the most powerful and underutilized programs that the government has to offer today is the Roth IRA that was established by the Taxpayer Relief Act of 1997 (Public Law 105-34). When I say underutilized, I mean that not everyone that can qualify for one is actually getting in on the deal. Most people know that the Roth IRA exists, but most people don’t realize that Roth IRAs are available for kids too.

I wrote an earlier blog post explaining how I was able to start a Roth IRA for my seven year old son in an article called The Roth IRA – Not Just For Grownups Anymore! I would recommend reading that post if you are interested in a real-life story on how to start an IRA for a child that is still a minor. It gives ideas on how to prove and document verifiable earned income; ideas on different jobs minors could do; ideas on how to do the minor’s taxes (if necessary) and other helpful resources as well.

In this article, I want to get you excited about starting a Roth IRA as soon as possible for your children, nieces, nephews, grandchildren, etc. and not waiting until they turn seven like I did, to get them off on the right financial footing. I want to stress that it is never too late to start investing, but I also want to stress that the sooner the better; because time is the most important factor in the money game. The more time you have to invest your money, the more times your money can compound and grow exponentially.

First, let’s start out with some important facts and maybe some misconceptions about Roth IRAs:
  • Anyone, at any age, is eligible for a Roth IRA -- As long as they have verifiable earned income below the limits set by the IRS, or are the Spouse of an income earner, having an earned income equal to, or more than, the combined contributions of both. The eligibility limits, regarding earned income, for a Roth IRA in 2010 are:
    • Single, filing single, with a Modified Adjusted Gross Income of $105,000.00 or less
    • Married, filing jointly, with a Modified Adjusted Gross Income of $167,000.00 or less
  • An individual may have as many IRAs as they choose -- The total annual contributions, to all, cannot exceed IRS annual limits.The annual contribution limits for Roth IRAs, in 2009, are as follows:
    • Anyone under age 50 is $5,000.00 per year.
    • Anyone age 50, or over is $6,000 per year.
  • Annual Roth IRA contributions (after tax dollars) can be made before the money is actually earned, within any given tax year -- If you know how much is going to be earned for the year, you can actually invest the money early, which gives your money more time to compound. (You still have until April 15th to take the Roth tag off -- free of penalties -- the money if you have over-estimated)
  • It does not matter whose money goes into your child’s Roth IRA -- As long as it does not exceed the verified amount earned by the child that year.
  • Withdrawals are never required from a Roth IRA -- There are no “RMDs” or Required Minimum Distributions with a Roth IRA.
  • A Roth IRA may be “S-T-R-E-T-C-H-E-D” from one generation to another.
  • The beneficiary of a Roth IRA has several options -- All with tax-free distributions.
  • All the contributions to a Roth IRA can be withdrawn at anytime, tax-free, and without any penalty -- The earnings from a Roth IRA cannot be withdrawn, with some exceptions, until age 59 ½.
  • Roth IRA money grows tax-free and may be withdrawn tax-free, and without penalty, anytime after age 59 ½.
  • Roth IRA contributions can be made automatically, at specified intervals, to your mutual fund account, in amounts as small as $8.33 per month.
Here are some startling facts about money:
  • Every $1 invested where it will compound monthly for 65 years:
    • At 10% will be worth $647.47
    • At 12% will be worth $2,347.88
  • The difference, at age 65, between investing $5,000.00 at the beginning of the year your baby is born, an the end of the same year,
    • At 10% is $396,859.00
    • At 12% is $1,321,265.00
  • Assuming a 31% tax bracket:
    • A Traditional IRA would have to be worth $1,449,275.00
    • To be equal to a Roth IRA that was worth $1,000,000.00!
  • $100 worth of toys & gifts from Grandparents, Friends, Relatives, or You, on your child’s first birthday if compounded monthly for 64 years:
    • At 10% would be $58,609.00
    • At 12% would be $208,360.00
  • At the birth of a new born, start investing $1 a day for 65 years, compounding monthly:
    • At 10% will equal $2,346,671.00
    • At 12% will equal $7,110,975.00
  • However, waiting to start until the child’s 5th birthday, will reduce the amount at age 65:
    • At 10% by $1,000,000.00
    • At 12% by $3,912,000.00
  • Here are some interesting calculations for if you were to start funding a Roth IRA at birth and made one-time investments for 1, 2, 3, 4, and 5 years:
    • Here’s what it would look like investing $1,000.00:
    • Here’s what it would look like investing $5,000.00:
Now let’s put things into perspective:
The average American employee works about three hours, out of every eight, each work day just to pay taxes. Yet that same worker could make their kid a millionaire in forty-five years by investing just twelve minutes of wages each day -- assuming a 10% annual rate of return. 12 minutes per work day is approximately $100 per month, for the average American worker.
  • $100 per month for 45 years @ 10% = $1,056,986.00
  • $100 per month for 45 years @ 12% = $2,166,924.00
I hope this gives you some ideas and makes you realize how an insignificant investment today can make a significant difference in the future. By taking action now and by passing this knowledge along may greatly improve your lifestyle as well as that of future generations and you can leave a legacy that can help change the world for the better!

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.
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