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In 1716, Christopher Bullock wrote, “Tis impossible to be sure of any thing but death and taxes.” Two centuries later, researchers keep trying to disprove the first, while Washington DC seems intent on proving the second.
However, through the law of unintended consequences, Congress made it possible for you to make your kids millionaires without them having to pay a dime in taxes!
What’s even better, it’ll cost you less than $20,000 per kid!
Like most parents, we do everything we can to help our three kids succeed. This includes putting them through college, which these days is a six-figure expense per student in most decent schools.
Still, this is a good investment based on information from the Social Security Administration that says a college degree increases lifetime earnings by more than $630,000, and a graduate degree may be worth over $1,100,000.
While a college degree can generate a lifetime return of 500% or more, I’ve come up with a hack that significantly tops that lifetime return on your investment.
What You Need
To make this work, you need just three things.
How Does It Work?
When Congress passed the Taxpayer Relief Act of 1997, they established the Roth IRA. In this individual retirement arrangement, you contribute after-tax money, but no taxes are ever due on withdrawals in retirement. The critical part is that contributions must come from income earned on work.
Now before you object, “you said this is without paying taxes and now you say contributions have to be after tax!” — that’s why I said you need a teen, who will likely not earn enough to owe income tax and who has a very long time until retirement.
What’s the Result?
I created the following (very simplified) table with an assumed average annual return a tiny bit over 7% (US stock market annual returns have averaged about 10% since before the Great Depression), and a retirement age of 67. As you can see, with $5500 annual contributions from age 16 to 22, your teen would have over $1 million at retirement.
Illustration of contributions and their value at retirement age of 67, assuming an annual return just over 7%.
That’s it! Your teen contributes $38,500. You partially match that at a total cost of $19,250. Your teen retires as a millionaire even with no other retirement investment; and since it’s a Roth, withdrawals in retirement are tax-free so this is worth much more than the same million dollars in a tax-deferred account.
What’s the Catch?
There are of course a couple of caveats (aren’t there always?), but they’re not too bad. First, stock market returns aren’t guaranteed; but over a 45-to-52-year period, they should be reasonably safe.
Second, inflation will nibble at the dollar, so a million bucks will be worth a lot less 52 years from now than they’re worth today. Still, it’ll be a whole lot more than most people have when they (want to) retire these days.
Not a bad return for less than a single year’s cost of attendance at a good state university, wouldn’t you say?
This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.