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Article:
Roth IRAs for Kids:
What They Are and How They Can Grow
(about 1200 words)
By Hannah McMunn and C. Edward Wall
I’m 16 years old.* By the time I retire I will be a multi-millionaire and in control of my financial achievements. You can too.
Taking control of my financial future began when I was 10 and my older brother was 12, but we didn’t know it then. That’s when our grandfather first sat down with us and talked to us about Roth IRAs. Roth what?? Roth individual retirement accounts? Why did we need them? We didn’t have jobs and were a long way from retirement. Our grandfather must be delusional, but we listened politely and then went back to the games we were playing.
Our grandfather lives in Michigan and we live in Wisconsin, so we don’t see each other very often, but after that, every time we were together, sooner or later our grandfather would talk to us again about Roth IRAs and why they were important to us.
Then when I was 12, our grandfather sat down with us and helped my brother and me develop plans to earn money with which we could start our Roth IRAs. My brother and I followed our plans, and next March, when our grandfather visited again, he went with our father, my brother and me to a discount broker in Madison to help us set up our “custodial” Roth IRAs (Because we were under the age of “majority” – 18 in most states, our father had to be the custodian (care-taker) of our accounts.)
We still didn’t appreciate fully what we were doing or what we had achieved. Today I’m 16. I have been working in a bank since I was 15 – as the drive-up window teller. Now I understand what our grandfather was teaching us, and why it was so important to him – because it gives my brother and me a huge financial head start in life.
Roth IRAs are individual retirement accounts. There are two kinds of IRAs: Traditional and Roth. With a Traditional IRA, money invested in the IRA is “pre-tax” money. In other words, money invested in the Traditional IRA reduces our taxable income at the time the investment is made. However, that money will grow extensively over time, and when we retire and begin drawing upon our IRA, all that money will be taxable. The thought is that after we retire we will be in a lower tax bracket, so deferring taxes would be to our advantage. However, that very often is not the case.
Monies invested in a Roth IRA are “after-tax” dollars. That means we already have paid taxes on the money, providing us no benefit in terms of reducing our current tax obligations. However, the money will grow all the rest of our lives tax free. Unlike the Traditional IRA, we don’t even have to start using the money from our Roth IRA when we retire. It can just grow and grow, and never be subject to federal income taxes.
The huge benefit of Roth IRAs comes from compound interest which is free from taxes. That means all the interest earned on our investments is reinvested – and future interest is earned on that as well. Say you invest $100 at 10 percent interest. After the first period (year) you would have $110. After the second period you would have $121; after the third $133; after the fourth $146; after the fifth $160; after the sixth $176; after the seventh $193.60; after the eighth about $213. In the eighth period, you would earn about $19.40 compared to the $10 you earned at the end of the first period. You haven’t added any more money, but your initial investment has grown more rapidly each year than the year before, and has more than doubled. That growth will continue to accelerate in the years ahead.
Consider this scenario. If you open a Roth IRA with an initial deposit of $600, and then add $50 per month, with annual interest of 10% (compounding monthly), at the end of 50 years you will have a balance of $953,441 -- $922, 841 of which comes from compound interest. Consider that your total investment – spread over 50 years -- is just $30,600 – the price of a new car today and the cost of that new car will be spread over a much shorter time frame.
If, in the above example, the investment period is shortened just 1 year -- to 49 years, the account would total only $862,498 -- $90,943 less. On the other hand, if you extend the investment period to 60 years (not unrealistic for a kid between the ages of 9 to 12), your total is $2,591,247.93 – and your actual investment is $36,600, spread over 60 years. That’s the power of compound interest.
Getting my brother and me started early investing in our Roth IRAs, means that our investments will double many times before we retire – perhaps as many as seven or eight times. The above example illustrates why starting early offers huge rewards.
Any kid that has a job can establish a Roth IRA. All it takes is earned income – which means either wages reported on a W-2 form or self-employment income. Older kids may work for an employer that pays wages and withholds taxes. Younger kids usually will be self-employed, doing work at home or for relatives or neighbors. Kids should not be given allowances, because that doesn’t count as earned income. Instead, a fee structure should be developed for jobs performed at home or elsewhere. Money paid for doing the related jobs is earned income, and can be invested in a Roth IRA.
Remember, when you invest in a Roth IRA, you will want to let the money grow and grow for retirement. Even though the money you invest in a Roth IRA can be withdrawn before retirement, doing so stops compounding of the interest, and you will lose a tremendous amount of growth on your money.
Roth IRAs can be started at your local bank or credit unions. Ask your bank or credit union what their minimum account requirement is for opening a Roth IRA.
You can learn much more about Roth IRAs for kids from my website – www.IRAKids.com. My grandfather and I developed this website when I was 13 – as a way to help education other kids and their parents/guardians about the benefits of Roth IRAs.
Recently I filmed a segment on the PBS program, BizKids, which discusses Roth IRAs for kids and the power of compound interest. The YouTube link for that video is: http://www.youtube.com/watch?v=6dzpNd3megg
I also have prepared a PowerPoint presentation on Roth IRAs for Kids, which can be used by you, your parents or guardians, and grandparents to learn about Roth IRAs. The PowerPoint also can be used to make a presentation on Roth IRAs for kids at a boy or girl scouts meeting, at a PTO meeting, a church youth gathering, or on other occasions to share information on this important topic.
The BizKids episode and the PowerPoint presentation are on the homepage of my website --- www.IRAKids.com.
Now is the time for all of us kids to get a financial head start in life and the best way we can do it is through Roth IRAs.
*Hannah was 16 when this article was written during the summer of 2011.
© 2011, IRAKids.com. All rights reserved.
Roth IRAs for Kids: What They Are And How They Can Grow, by Hannah McMunn and C. Edward Wall, describes how Hannah at 12 years of age started her Roth IRA. She describes what Roth IRAs are and explains how compound interest can double a kid’s investment in them many times in future years. Roth IRAs and compound interest are keys to a kid’s future financial success and wellbeing. This article is made available for educational and republication courtesy of IRAKids.com.
This article may be reused freely for educational purposes and may even be reprinted in other print financial publications (e.g., credit union newsletters) to encourage kids to start Roth IRAs as soon as the kids have earned income. The article may not be sold or included in a publication that is to be sold. The article may not be loaded on other websites, but the abstract may be used and/or the article may be summarized on other websites. In all cases, the authors and the IRAKids.com website must be credited with authorship, and links should be provided back to the IRAKids.com website -- for additional information on this subject. For other uses of this article, please contact IRAKids.com.
For additional articles on Roth IRAs for Kids, which may be reused according to the “Guidelines” noted above, please see Articles by Hannah on Roth IRAs -- for Free Reuse Elsewhere.