What if?

[armor99]

Unfortunately, I am laid off at the moment. So pardon me some venting and rambling. I got to thinking about compound interest, the way it works, time frames involved etc. And I came up with something so profound. So simple, easy to do, and life changing, I thought I would share. Not some wierd scheme, no "manifesting" woowoo nonsense, just a bit of money, a lot of resolve, and a LOT of time. I hope someone reading this actually does this. It would make me happy knowing I inspired someone to change their new born's life.

What If......... when a baby is born to a family, the parents decide to do the following. Setup a brokerage account. (or even better, with some fancy accounting a Roth IRA. think business where the child can claim some super small amount of income). They invest $1000 into the child's Roth IRA. And each month, they invest an additional $84 into that account (something simple like Vanguard total stock market). And they continue doing this, never stopping throughout the child's life. It becomes a pattern, a habit, something that is so much part of your life, that not doing it would seem foreign to you. From the age that your child is barely old enough to understand, you drill into them "Remember, $84 a month... never miss, never forget". So much so that you are assured, that even after you both are gone, the child will continue with this tradition. If for no other reason, than to honor their parents memory. And when that child. When that adult man or woman hits 65..... the reward. More money than most will ever contemplate. All for the small sum.... of $84 a month. (or $1000 / year) So for an investment of $66,000 you can get over 5 million!!!

Do not take my word for it. Plug it into a compound interest calculator like I did..... what a family legacy that could be.... what a gift... to give to a child.

 

[GrayHare]

It's a cool idea, and should add up if not pillaged. OTOH, 65 years of inflation will have a say in the matter.

 

[RetiredHappy]

Er... I don't think you can contribute into a baby's ROTH account. Interest rate 10%, I don't think so.

 

[Closet_Gamer]

Re-run it with a 7% growth rate and you should get an answer in “today dollars” assuming a 3% annual inflation rate.

 

[disneysteve]

Many parents do that with a 529 at least. That's only for 18 years but it still adds up nicely when college rolls around.

 

[Gumby]

If a child has earnings of some sort, then your Roth plan could work, but infants typically don't. Here is a primer: Custodial Roth IRA: Your guide to Roth IRAs for kids | Fidelity

You also could do something like this with an UGMA account, but 1) the income on the account is taxable (not a problem in the early years but will be substantial in the later years); 2) it is considered an asset of the student for FAFSA and reduces financial aid for college; 3) the child has full access the the account once they hit 21 (so they need to be committed to not touching it for the next 44 years after that); 4) inflation needs to be taken into account (as others have mentioned). Points 3&4 also affect the Roth.

 

[Stormy Kromer]

We set up 529's for our children at birth. $200 month each for 18 years put them both through college.

I love the idea of long term investing. I would suggest not telling the young one how much money they will be getting. It might give them a Lazy Pill. Not all would, but I have seen some trust fund children act that way.

Another thing is, don't rob them of the satisfaction of earning their own way in life.

Not giving advice, our children will be multi-millionaires when we pass. But, we've made sure that they have the satisfaction of earning their own way in this world.

I admire your thoughts on investing in the future of your family. I keep a big pile of investments in reserve in case of a family member running into hard times for health issues. It isn't greed, I think of it as being a responsible family steward.

 

[Closet_Gamer]

We set up 529's for our children at birth. $200 month each for 18 years put them both through college.

I love the idea of long term investing. I would suggest not telling the young one how much money they will be getting. It might give them a Lazy Pill. Not all would, but I have seen some trust fund children act that way.

Another thing is, don't rob them of the satisfaction of earning their own way in life.

Not giving advice, our children will be multi-millionaires when we pass. But, we've made sure that they have the satisfaction of earning their own way in this world.

I admire your thoughts on investing in the future of your family. I keep a big pile of investments in reserve in case of a family member running into hard times for health issues. It isn't greed, I think of it as being a responsible family steward.

I agree with all of this.

Especially developing the will, skills and confidence to find your own way in life.

 

[armor99]

Er... I don't think you can contribute into a baby's ROTH account. Interest rate 10%, I don't think so.

You would have to get "creative" to show your child had income. You can match up to the amount they "earned" in a year provided you do not go over the contribution limits. It is a super small amount per year ($1000). I was thinking something along the lines of you have an LLC and you send out X-mas cards with their picture on it, so this was their "modeling fee". With such a small amount of income, I am sure a tax person could figure out a way to make that legit. When theyturn 15, they can easily earn that in a summer job. I had to do one of those every summer since I was 14 till the time I left for college.

As far as percentages go, over the very long term (like 65 years), the stock market has a rate of about that, if not higher. My crystal ball is no better than anyone elses, but it seemed a good benchmark for me. Could it be a little higher, or lower in 65 years... sure... but the point is... a LOT of money can be made doing this. What a legacy to offer your children, or perhaps pass down to grandchildren.

 

[Koolau]

We started our kids' Roths when they were in their late teens (and making money.) By now, they're all well over 100K balances in mid 30s. They've never actually contributed though we sorta hinted they should (and stopped funding in mid 20's.) It would be cool to start new-born kids with Roths if there were some way to do it.

 

[njhowie]

Or, just put $10,000 in on the day the child is born and forget about it. Same end result.

Not many folks would use 10% for annual return over a 65 year period.

 

[folivier]

That's what we're doing. $10k in each grandkids UGMA on their first birthday. Along with a gold Maple Leaf just 'cause.

 

[Koolau]

That's what we're doing. $10k in each grandkids UGMA on their first birthday. Along with a gold Maple Leaf just 'cause.

Interesting. Who holds the Maple Leaf?

Also, strictly for curiosity, why a Maple Leaf instead of a Gold Eagle? (or K-rand?)

 

[folivier]

Their parents, when I bought them years ago the ML was a bit cheaper. No other reason. Their parents are also in control of the investments. Just a leap of faith on my part.

 

[Koolau]

Their parents, when I bought them years ago the ML was a bit cheaper. No other reason. Their parents are also in control of the investments. Just a leap of faith on my part.

Gotcha! Thanks.

Not sure I'd trust our kids with keeping track of a ML or other such coin for the GKs. Our son, especially, could lose his head if not attached, but that's another story. I THINK some gold coins or bars can be included in investments such as tIRAs but don't know about UGMAs.

I like the idea of starting the kids out with time on their side. Makes a lot of sense. Imagine 20 years of compounding. Nice!

 

[CardsFan]

Couldn't you accomplish the same thing with a Roth in the parents name with the child as beneficiary? If there was a desire to give it early, then the Roth could be emptied and gifted at that time. Sure, taxes would be due on future earnings, but what the heck.

Am I missing something?

And, Re: 10%, sounds high, but I just looked and the S&P has returned over 10% (including dividends) over the last 65 years.

 

[The Cosmic Avenger]

That's why we matched in Roth contributions what our kid made at their summer job.

 

[CRLLS]

Couldn't you accomplish the same thing with a Roth in the parents name with the child as beneficiary? If there was a desire to give it early, then the Roth could be emptied and gifted at that time. Sure, taxes would be due on future earnings, but what the heck.

Am I missing something?

And, Re: 10%, sounds high, but I just looked and the S&P has returned over 10% (including dividends) over the last 65 years.

This is essentially what I did earlier this year for my grandkids' further education. I have one in her 1st year and 2 more just entering grade school. Each was allocated the same amount, hoping to keep up with inflation. The main difference is, I am using investments that cannot lose value due to market conditions. Currently SPAXX earning 4.93%. I don't want to have to time the market and lose.

Using a Roth for a DIY 529(ish) Plan

Following the "gifting with a warm hand" thread. DW and I want to help our grandchildren with their college expenses. Not a large amount, but enough to ease the burden a little. However, we want to provide some choices on their part and to incentivize good choices. My grandchildren are of ages 5...

www.early-retirement.org

These are in 3 separate Roths. Each Roth is held in my name and each grandkid named as beneficiary of "their" account. If conditions exist 10-15 years from now, I can pay them an equivalent amount from one of my taxable accounts and merge the Roths back into my own Roth for tax-free future gains.

 

[GrayHare]

Couldn't you accomplish the same thing with a Roth in the parents name with the child as beneficiary?
Am I missing something?

Actuarial tables say most parents will not live to see their child's 65th birthday. Since children are not qualified beneficiaries, they would need to empty an inherited IRA within 10 years whereas they could continue to let a Roth established in their own name grow.

 

[ncbill]

That's why we matched in Roth contributions what our kid made at their summer job.

one of our kids attended a service academy where they earned military pay (35% of O-1 base pay) so we had them contribute the max every year to a Roth & we gifted that amount to them.

 

[Koolau]

However you can help them to have a Roth account in their own name is what seems best to me. So far, our kids haven't seemed to want to contribute on their own, but maybe some day they will. If not, they'll still have what we started for them and that will be a significant pre-inheritance.

 

[misanman]

We started a 529 for first GS - didn't think we'd end up with 10 GK's eventually

Make monthly contributions up through age 14. So far four have used them (2 graduated, 2 will graduate next year). Still making contributions to three of them. Compounding has nearly doubled the value.

 

[RetiredHappy]

It's always a difficult conversation to have with my son - high functioning / on the spectrum, about anything that is different from what he does. Anyway, I finally worked on him earlier this year about opening a ROTH account. It was a 3-day conversation before he caved and I sat next to him to get it opened. The issue was that he could not get me access to his account without a trip to Fidelity, so that went into a 4th day. Even so, he insisted on keeping the money in CDs. It will take a couple of years for him to let me do whatever I want with his account. Baby steps. But having said that, he now has about $250K in his brokerage through several years of gifting. There are alot of legacy ETFs/positions from the days of Merrill Lynch management, although I try to simply new money that I put in each year with a couple of ETFs.

 

[Sue J]

We started a 529 for first GS - didn't think we'd end up with 10 GK's eventually

Well, that's a wonderful surprise!

We have two grandsons. For each one we opened a 529 account as soon as they got their SS numbers. We contribute $1000 per year on their birthday. And a couple relatives give small gifts using the gift code.

They are in Kindergarten and preschool so plenty of time left for growth.