IRA Beneficiary
38. Jump Start Your Children's (Grandchildren's) Retirement Fund
You can also jump start a retirement fund for your children and grandchildren.
Each year, you can contribute 100% of the child's earnings, up to $5,000. The results can be phenomenal.
For example, your enterprising grandson is earning at least $5,000 every year. You start making $5,000 annual contributions to his Roth IRA when he is age 15. He continues them when he starts earning more money. So $5,000 contributions are made every year for 50 years, until he is age 65. Assuming 7% growth each year, his retirement fund at age 65 would be worth over $2 million... specifically, $2,032,645! And, after he reaches age 59 1/2, it's all tax-FREE!
Withdrawals before age 59 1/2 are considered as contributions first, then earnings. So there is no income tax or 10% penalty until all contributions have been withdrawn from the account. Money can be withdrawn at any time without penalty for college expenses. And the account can be tapped tax-free at any time for up to $10,000 to buy or rebuild a home.
So, this is quite a remarkable nest egg you would be setting up. Just keep in mind that the child will be the owner of the IRA, so he or she will have full control over the money at legal age.