This article originally appeared on the Motley Fool.
Parents want to make sure they give their children the best possible start in life. But many parents don’t make one simple move that could turn their children into multimillionaires by the time the kids are ready to retire. That move: opening a Roth IRA when a son or daughter is very young and contributing a few hundred dollars to it every month.
Not every parent can afford to do this, of course — and there are requirements for opening a Roth IRA that not everyone can meet. Still, the younger a child is when a Roth IRA is opened, the greater the chances he or she has of becoming wealthy. While you may not be able to max out the annual contributions or open the account when your child is a newborn, it’s worth learning how to make use of a Roth IRA as soon as you can.
How a Roth IRA could turn your child into a multimillionaire
A Roth IRA is a retirement account that comes with significant tax advantages. Money invested through a Roth IRA is exempt from dividend taxes and capital-gains taxes, which means any profits made by selling investments within the account will not be taxed. Further, any “qualified” distributions are also free from taxation. In other words, as long as a withdrawal from the account meets certain requirements — namely, if the account has been open for at least five years and the owner is at least 59-1/2 years old — then that income will not be taxed.
If you open a Roth IRA for a child when they turn 12, invest $5,500 into that account each year (the current contribution limit as of 2017), and have your child continue doing the same each year after they turn 18, they would have more than $3 million by age 65 without ever increasing their contributions, assuming the account earned a respectable 7% per year.
The total amount of money invested over the course of the child’s life would be just $291,500,…