August 06, 2015
So often grandparents come up to me and ask how they can best help their grandchildren get a leg up. My favorite move is to gift a grandchild money to open a Roth IRA. Here’s what you need to know:
• Anyone with earned income is allowed to contribute to an IRA. The only requirement is that your IRA contribution be at least as much as your earnings in a given calendar year. So for example, a grandchild who earns $1,500 at a summer job would be able to contribute $1,500 to an IRA. But we’re agreed that convincing an 18-year old to save for retirement might be a hard sell. So that’s where grandparents come in: you can give them the money to seed a Roth IRA.
• An IRA contribution can come from gifted money. Again, the only rule is that the account holder (your grandchild) has earned income that is at least equal to the amount of the IRA contribution in a given year. The IRS is perfectly okay if you want to gift that amount.
• This is the ultimate compounding gift. A single $1,000 gift invested in a Roth IRA will grow to more than $18,000 in fifty years, assuming a 6% annualized rate of return. Make those gifts for five years and your $5,000 in total contributions will have grown to more than $80,000. Talk about a legacy!
Now if you’re a parent and wondering why I am talking to grandparents only, well, because my sense is that parents probably still have a lot of items to cross off their own Financial To Do list. Such as: Making sure you are on pace with your own retirement savings, paying off credit card debt, and having an eight-month emergency fund all must be polished off before you are to ever consider helping a child with their retirement savings.