retirement

Fund a Roth IRA for Your Grandchild

Help your grandchild foot the bill for college to avoid big student debt later.

Helping your grandchildren avoid student debt is a worthwhile endeavor, but it’s not the only way you can safeguard their financial future.

As long as your grandchild has earned income, he or she is eligible to own a Roth individual retirement account. She doesn’t have to fund the account with her own money, however. You can match her earnings dollar for dollar, up to a maximum of $5,500 in 2015.

Your grandchild won’t get a tax deduction for Roth contributions, but most young people don’t make enough money to benefit from a deductible IRA, says Charles Bennett Sachs, a certified financial planner with Private Wealth Counsel, in Miami. As long as your grandchild waits until age 59½ to withdraw money, all of the earnings will be tax-free.

And thanks to the powerful effect of compounding, those tax-free earnings could be substantial by the time your grandchild retires. Suppose you contribute $5,500 to your 16-year-old grandson’s Roth IRA and make annual contributions for another 10 years. By the time your grandchild is 26, he’ll have nearly $85,000 (this assumes a 7% average annual return and that the maximum contribution is adjusted for inflation). If he continues to make annual contributions on his own after the 10 years, he’ll have nearly $3.2 million in savings when he turns 65. By comparison, if your grandchild waits until age 30 to open a Roth, he’ll have about $1.49 million in the account when he turns 65. “You can never replace those early years,” Sachs says.

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