Right now, the U.S Government has an insatiable appetite. It wants its citizens to pay more taxes, or label them as “unpatriotic” if they don’t. They have forgotten that the impetus for the American Revolution in part was an unfair 2% tax levied by an emperor who also wanted new forms of “revenue.” There is also no sign that spending will decrease as long as those who look at sloth as a virtue continue to be satisfied with the scraps that are thrown to them by our emerging Big Brother.
There are wonderful places to put your money, and for all of the recent vilification by our so-called leaders, the U.S. stock market is still one of the best long-term places to invest. Real estate, especially now, is the other. As a more centralized government believes that your success is unfair to those who cannot or will not create their own wealth, it is possible that more and more of your savings in 401Ks and IRAs will be subject to increased taxation for redistribution. That is why you should consider establishing a Roth IRA account for your teen (and yourself) as it is possible that those with existing accounts will be “grand-fathered” in preserving the existing benefits in the case where Congress wants to change the rules.
One of the greatest of the savings mechanisms currently available is the Roth IRA, named for the late Republican Senator Roth from Delaware (yes, Delaware sometimes produces competent Senators.) It allows an individual to save $5,500.00 per year in 2013. There is usually a catch up amount for those 50 years old and above, right now it is $1,000.00. The best thing about the Roth IRA is that because your contributions are after-tax contributions, your earnings are tax-free. As with anything tax free, your current government despises it, and may change it. However, it is a good bet that those who have existing Roth IRA accounts will be allowed to keep them and take advantage of the tax free income upon retirement.
You can start an IRA when you start working. Even if your teen has a part time summer job, they are eligible to start an IRA. Better yet, any money saved in a retirement account cannot be couted against them when applying for student aid for higher education.
So this year, as a way to make your teen a millionaire, start a Roth IRA account for them. It is unlikely that their savings may reach the current limit; however, I have a nephew who made $7,000 cutting grass two summers ago by establishing service contacts with many people in his neighborhood. The value of this is two-fold:
- It allows the teen to start saving and learn the value from it
- It develops a good habit for savings and investing sorely lacking in most teens and adults.
Let us say that your fifteen year-old and you decide that he or she can afford only half that amount to save. If that same amount is deposited every year without fail, by the time your fifteen-year-old turns 65, the value of the account will be $1.04 million dollars – with distributions tax-free. They can also leave the balance (that will continue to grow) to their heirs without them having to pay income tax. This is calculated at an overly conservative 6.5% return on investment.
However, what of at some point your child starts putting in the full amount at age 25? The result is over $1.56 million in tax free savings at age 65 that will still continue to grow based on how much they withdrawal each year until they pass. In essence, they could have a $100,000 per year tax-free income at age 65 while still allowing their account to grow. This does not include any other income from other investments like 401Ks or other savings.
As you start them on the path this holiday season, do not neglect to teach them about the value of individual giving. Whether that giving is in the form of time or money to serve the poor, the hungry, the destitute, or the helpless, it will allow them to understand that true generosity is done from their own purse and not from failed government programs where a bloated bureaucracy lessens the value of a dollar to only pennies.
Too bad Social security doesn’t work the same way as a Roth IRA. Within two generations, we would be the most prosperous nation to have ever existed. Along with the resultant prosperity comes an individual generosity that will do more for the poor and needy better than any social program ever devised. If you teach your children well about money, they will understand that the responsibility to save goes hand in hand with the responsibility of generosity and giving.
“I am for doing good to the poor, but…I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed…that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.”
― Benjamin Franklin
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