One of the secrets to teaching kids and grandkids about money is creating the opportunity for them to handle it responsibly, which includes watching potential growth. Why not fund a Roth IRA for a kid as a gift?
The magic of compound interest is indeed a gift that can keep on giving. Want to know how fast money can double in value? Consider the Rule of 72. This is a formula that shows you how long it could take for your investment to double in value based on a positive rate of return.
72 / Rate of Return on Investment (Interest Rate) = Years to Double
Based on this formula, let’s say you plan to give $5,000. At an interest rate of 8% it would take nine years to double that money to $10,000 (72/8=9). Gifting funds for a Roth IRA is a great way to give your loved ones a head start on building a tax-free fund for their retirement and a tangible way to show them how money can work for you.
If you are giving Roth IRA funds to a minor, the IRA must be in the minor’s name as well as the custodian’s name. Generally, if your giftee is not a minor, you’ll need to ask them to open the Roth IRA themselves. But you can give them the money to fund the account.
You can fund a Roth IRA as a gift as long as the recipient earned as much as your contribution. So, if your child earned $1,500 babysitting, scooping ice cream or mowing lawns, you could give them $1,500 to fund a Roth IRA. The maximum amount you can contribute (for people younger than the age of 50) is $6,000 in 2021. An Edelman Financial Engines advisor can provide more information and answer questions about this process if you’d like to fund a Roth IRA for a kid as a gift.
This is a hypothetical illustration meant to demonstrate the principle of compound interest and is not representative of past or future returns of any specific investment vehicle. They do not include consideration of the investment fees or expenses, time value of money, inflation, fluctuations in principal or taxes.