OPINION: Gift a ROTH IRA to your working age children for Christmas

With the festive season in full swing, and consumers bombarded to buy the latest products, a ROTH IRA may not look appetizing under the Xmas tree, but will prove to be an enduring gift.

A ROTH IRA for kids is a tax advantaged retirement account opened for a child who has earned income, which can be from babysitting, cutting lawns, fast-food work, or from any documented source of income. The account is managed by an adult — the custodian — and has a flexible range of investment choices, with earnings growing tax free, with the goal of developing disciplined savings for retirement. Funds can be withdrawn for emergencies. To be eligible, the child must generate annual income up to the amount invested, with the current limit of $6,500 p.a. (per annum). If a child worked from the age of 14 until they finished college at 22, and contributed the maximum — $6,500 x 8 years — and never contributed again, they would have over $1 million tax free on retirement at 59, based on historic returns of 8%.

When we opened accounts for our kids, they initially balked, telling their friends, “Guess what I got for Xmas, a ROTH IRA.” Now that they’ve finished their studies and seen the investment returns, they’ve come to appreciate the journey in financial literacy. Also, given their low earnings when a student, their after-tax contributions are in effect tax free.

Our children observed how we funded their degrees through investing $2,000 p.a. from birth to 18, through another tax advantaged program — Coverdale. Hopefully, they will carry on the tradition of sacrificing, saving, and investing to the next generation.