It's Never Too Early to Save for Your Kids
July 21, 2009 — -- Parents everywhere hope to put their children on a path to prosperity.
That's why some go to extremes. For instance, there are parents who will dish out as much as $40,000 to college admissions consultants to help their child gain entry to an Ivy League school, according to a recent New York Times report.
But I've got a better -- and cheaper -- way to ensure a secure financial future for little Johnny or Mary. Put them to work early in life, help them open a Roth IRA and make some modest contributions on their behalf.
Then sit back and let the powerful combination of time and tax-free compounding do its work in the decades ahead. For just a few hundred dollars a year, Mom and Dad can provide a secure financial foundation for years to come.
Figures outlined recently in the Journal of Financial Planning illustrate how just how this strategy can work.
In an article titled "The Roth IRA for Children: Multigenerational Wealth Planning," one example shows how nine $500-a-year contributions from ages 10 to 18 (total contributions: $4,500) could accumulate to about $112,000 by age 60, assuming a 7.2 percent annual growth rate.
Meanwhile, $500 a year contributions beginning at age 22 and ending at age 59 (total contributions: $19,000) would grow to only $97,000 under the same 7.2 percent growth rate, according to Mark G. Haug and Adrienne G. Cichelli, the article's authors.
