A gift that just keeps givingOn the Money
It’s the holiday season and time to wrap up presents that will be eagerly ripped open on Christmas morning. There will be jubilee and excitement in the air as each gift is unwrapped, but, will they be remembered this time next year? Although greatly appreciated, there is a high probability that they will be long forgotten. The i-Pad may be broken and the clothes too small or out of style. What if you could give a gift that just keeps giving? A tax free retirement nest egg could change someone’s life forever. It won’t be considered trendy or hot but will multiply exponentially over the years. How can you do this? Gift a Roth IRA.
Although not a requirement, most likely the recipient of this lasting gift will be your child or grandchild. In order to fund a Roth for someone, that person must have earned income during the year. For example, if your grandson Johnny earned income of $2,500 from bagging groceries in 2013, then you can help him secure a financial future by funding a Roth IRA. The maximum you can contribute to his Roth is $2,500 even though the Roth limit for 2013 is $5,500. Be vigilant and only contribute up to the amount of his earned income. Don’t feel you need to contribute his entire earned income. You may decide to contribute only $500. There are no IRS rules that say the contribution comes directly from Johnny. He may have spent his money on clothes, gas and insurance. But you fund his Roth.
Let’s do a little calculating and see what this gift could actually mean in retirement. What if you decide to fund a Roth for your child with $1,000? How much will it be worth when she retires in 40 years? At an investment return of 7 percent the fund will be worth close to $15,000. If you contribute $1,000 for the next 5 years, her account will be worth over $60,000 when she retires. At a 10 percent return, more in line with the average return of the stock market, the $1,000 will grow to over $45,000 and the five $1,000 gifts will accumulate to over $170,000. This is without another penny being added. Now, that is a powerful gift. And don’t forget that the withdrawals from a Roth in retirement will be 100 percent tax free.
If you can’t afford to fund a Roth for your loved one you could educate them on the value of opening a Roth IRA. You could make it a priority to have an educational lunch to discuss all the benefits of funding a Roth IRA. By setting the spark and curiosity you will be gifting them knowledge and power to help them make lifelong sound financial decisions. My father funded an IRA for me when I was in my early 20s. I was a newly minted college grad and was struggling to make ends meet. The $1,500 contribution he contributed has grown over the many years to a very nice sum. I not only still have this highly appreciated asset but it also inspired me to fully fund my retirement accounts each and every year afterwards.
Can’t afford to gift a Roth this Christmas? How about for a graduation, wedding or special birthday? No matter the occasion, it is a gift that just keeps giving.