Here's one way I might combine a periodic and single amount contribution to help our our three year old daughter become a millionaire.
- Start working at age 16. Optimally, it would be working for a future family business, since there is an additional tax benefit of not paying social security taxes. However, for any case, she could earn up to the standard deduction ($5450 for 2008) and pay no federal income tax. Assuming she made the minimum wage ($5.85) for 10 hours per week, she could earn about $2737 a year after state and social security taxes.
- Put the entire paycheck amount in a Roth IRA. Since she has earned income, she can contribute up to the maximum of $5,000 or wages earned, whichever is less. The major benefits of a Roth IRA are that earnings grow tax free and withdrawals after 59 1/2 are tax free.
Alternatively, the parents can make the contribution for the child and let them use the money they earn.
- Contribute for at least $ 2700 for 6 years. At 23 , her savings would be worth about $20,800 at a 10% return, which is above the amount needed for the One Year Contribution.
- Invest the savings in a diversified stock market index and wait 41 years. With a 10% return, the Roth IRA would be worth about $1,000,000 after that time.
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This is not financial or parenting advice. Please consult a professional advisor.
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