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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.

  • A business willing to hire your teen(s), paying enough to make at least $5500 a year working part-time
  • Your teens’ willingness to work while in school and their agreement to invest $5500 of earnings each year without touching it until retirement (this is a tough one, which is why you need the next and final piece)
  • Since most teens aren’t big on delayed gratification, you need $2750 a year for seven years, to gift your teen $0.50 of spending money for each dollar she invests

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.

  • From age 16 until graduating from college at age 22, your teen work and earn at least $5500 each year
  • You help your teen open a Roth IRA (e.g., with a low-cost, no-load S&P 500 index fund or a good target-date retirement mutual fund)
  • Each payday, your teen invest her entire paycheck, until the year’s total hits the Roth IRA contribution limit (currently $5500)
  • Unless your teen is happy delaying spending any of those earnings for a few decades (yeah, right!), you offer a match of $0.50 spending cash for each dollar sent to the IRA
  • If needed, you help your teen file annual tax returns that will most likely show no tax owed

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.

table-showing $5500 saved each year from age 16 growing to $1 million dollars

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?

Disclaimer

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.

Opher Ganel profile pic

Opher Ganel

About the author:

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.

Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.

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.

7 comments

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7 Responses

  1. CommunityManager says:

    Wow! This is really something @oganel! I would give anything to share this information with my 16 year old self! Thank you for sharing this. By the way, as a very proud college graduate from a “proper University”, even I have to admit that the model for higher education in this country is broken. As more and more of the current and future generations eschew University life for online colleges (and save a huge amount of money while doing so), your return on [education] investment scenario will look even better, since kids won’t obtain a massive anchor of debt to go with their shiny new degrees.

    • Opher Ganel says:

      Truly, if you have teen-or-younger kids, I’d say this is the perfect time for you to read this. A typical teen, even if she saw this article, would likely not go to her parents and ask, “Mom, dad, can we do this?” It’s just the nature of things that most teens don’t think about their retirement until they’ve left their teen years long behind them. However, a parent of a teen would probably be in his/her 40s, a time when their own retirement (or desire to ever be able to retire) becomes something they think about. At that point, learning that they can give their kids a huge leg up on *their* eventual retirement at such a low cost can make a huge difference.

      Regarding a college degree, I’m still a huge believer in the value of a real physical college. IMO, college is about a lot more than gaining knowledge and skills. It’s also about leaving the nest to an environment where there are real-life consequences to bad choices, and where mom and dad aren’t around to hound you.

      Given that these real-life consequences are not a huge as they tend to be once you’re out of school, it’s a great place to learn valuable life lessons. Not least of these is how to manage yourself and your time, how to socialize with peers who are there all the time (especially room-mates), how to deal with professors (an early proxy for supervisors once you get a job), how to learn new skills and implement them, and how to manage (a little bit of ) money especially if you work part time (as I’d recommend all students do).

  2. Brian Thorp says:

    Subscriber bonus: Did you have an interesting part-time job as a teen? Or a memorable experience working as a teen that makes you laugh (or cringe)? Tell us about it in the comments section. We’ll select two posts that make us laugh or cringe the most to share in an upcoming newsletter and we’ll reward you with a ???? for sharing with the world!

  3. Ross says:

    I worked at my local McDonalds in summer and winter breaks from college. My father matched my annualized paycheck into a Fidelity traditional IRA (Joe Roth was yet to get his legislation passed). This provided a great start for my retirement savings and showed me the power of compounding. Thank you Opher for this great suggestion to all the parents that may read this. I am excited for when my son ages into the working world and I get to do the same for him.

    My only cringe-worthy recollection of those summer counter shifts at McDonalds is one afternoon when about eight seniors from my high school came in to fill up on the plain hamburgers that were on sale for like 25cents that week. These guys probably looked at me and thought, “he graduated two years ago and he’s working at McDonalds – what a loser.” It was a little humbling and embarrassing taking quarters from their smiling and giggling faces and serving them hamburgers…but my IRA is smiling now.

    • Opher Ganel says:

      Thank you for your comment and for your kind words. In response to your cringe-worthy moment story, I totally understand, but as you probably know now from the distance of years, any job well done honors you. I don’t care if it’s as a McDonald’s staff person or anything else.

      Also as you say, your IRA is smiling now – love that!

    • Brian Thorp says:

      Great post, Ross! Your father deserves credit for his thoughtful approach to “super sizing” your earnings! ????????

    • Wealthtender HQ says:

      Hi Ross! We’ll be using excerpts from your post in this week’s newsletter, so keep an eye on your inbox for information about our gift to you for participating in the subscriber bonus. Thank you for being an active contributor to the Wealthtender community!

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