Make Your Child a Multi-Millionaire Tax Free with a Roth IRA

by Hank Coleman

If you contribute $5,000 a year to a Roth IRA in your child’s name from the time he starts mowing lawns or she starts babysitting at the age of 12 through college, your child will amass $6.1 million dollars when he or she retires at age 65 (assuming 10% annual growth). Sound too good to be true? It’s not. Here’s how to make your child rich:

Open a Roth IRA for your kid as soon as they start earning an income. The income part is the linchpin. They must have an earned income in order to qualify for a Roth IRA. Allowance, birthday money from grandma, and savings account interest does not count.

A W-2 form would help ease the IRS’s worries about their earned income requirement, but it is not mandatory. If you keep good records of all your children’s lawn mowing and babysitting gigs, that will be good enough for Uncle Sam. It would also look better if a majority of their jobs were not at your home. Get them to mow the neighbors’ yards and watch the neighborhood kids instead of just your yard and their siblings. You can contribute an amount equal to 100% of what they earned for the year or the Roth IRA maximum contribution level of $5,000 per year.

Not only is the interest and capital gains tax free for minors who own Roth IRAs just like it is adults, but many minors’ incomes are not taxed at all because their small earnings are below the standard deduction. So, minors using this plan will pay negligible taxes on their earned income and their investments will also grow tax free in a Roth IRA. It is almost like having the best of a 401-k and Roth IRA plan all wrapped up into one deal.

Time is of the essence though! This plan relies on compounding interest. Your kids’ investments will grow beyond your wildest dreams the sooner you start. $5,000 invested per year earning 8% interest annually from the age of 12 to 18 (just seven years) will grow to almost $1.8 million tax free by the age of 65 or $830,000 at age 55 if they wanted to retire early. But, if you waited to start contributing to a Roth IRA until your child was 18 years old and maxed out a Roth for the next seven years and contributed nothing more, your son or daughter would only accumulate $1.1 million by the time they retired at 65 years old. The power of compounding is magnified by the age that you start investing. The sooner you can begin investing for your children, the better their retirement nest egg will be. How great a gift would this be if you could give your children a secure retirement with as little as $35,000 invested over seven years when they were just teenagers?

Don’t believe me? That’s okay. Check my math with this Microsoft Excel spreadsheet in our resource section where you can change the assumptions and see the results for yourself.

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Allen Taylor September 26, 2008 at 10:34 am

Nice writing. You are on my RSS reader now so I can read more from you down the road.

Allen Taylor

Hank@MiB Smarter Money September 26, 2008 at 8:58 pm

Love the article (and the name) and it really does ring true. Many people just don’t realized the benefits of compounding interest. 😉

Alex November 18, 2008 at 1:40 pm

Thanks for the great post; Thank god I’m nowhere near having kids yet, but man this is a great idea. Setting up something like how companies match your 401k input (at least for the time being) with your kid once they start earning seems to be a great idea. I wish my parents had thought of it.

Financial Fellow November 18, 2008 at 2:50 pm

Good Article. I think it would also be prudent to form a corporation and hire your son/daughter in the process. From a paperwork accountability point of view. Starting at age 12 is a good idea. But why not give it a whirl when they are younger. Say age 9 or 10? Are there concerns that the government may challenge that?

Ritchell November 18, 2008 at 6:13 pm

Wouldn’t a child only have to earn $2,500 a year, since your matching brings it to a max contribution of $5,000. Also, can a 12 year old earn $2,500 in a year, and repeat that performance over 7 years consecutively? I’d want that kid as a business partner.

EK November 18, 2008 at 9:59 pm

Great article, but I think we all know 10% annualized growth is not realistic….especially when relying on compounding each year on the additional 10% to achieve the number. The concept is right on…stash away cash and grow tax free. I would probably die of shock if taxes weren’t higher 30 years from now…

There is zero chance of compounding on consistent returns each year so it would be interesting to see a chart of up 30%, down 25%, up 4%, down whatever, etc.

Hank November 22, 2008 at 12:21 pm


Thanks for the comment. You as the parent can only put the same amount of earned income into a child’s Roth IRA upto the max of $5,000 a year. So, even if you matched dollar for dollar as an incentive, your child must still earn at least $5,000 and not just $2,500 to max out a Roth even if the child is only contributing $2,500 to the pot of money. Hope this clarifies…

John Coktostin February 14, 2011 at 2:18 pm

That is a huge amount of money and an extremely good idea if you have the money to add to your child’s Roth IRA.

Geo May 18, 2017 at 8:43 am

Roths are a great idea …. BUT — 10% yearly?? dream on And “tax free” — coming out yes but you have paid it going in

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