So You Want (Your Kid) To Be A Millionaire

As parents we want the best for our kids. We want them to grow up to be happy, successful and well adjusted. We spend money on clothes, food and activities for our kids every day. But how many of you are investing on your children’s behalf today? The laws of compounding interest make this one of the best things we can ever do on our child’s behalf. By investing early we give them a running start at a sound financial future.

Ignoring tax implications for a moment, did you know that if you invested $2500 for your child the day they were born and it achieved a 10% annual return on investment that at age 65 your child would have over $1.2 million? That’s without you or them ever having invested another dime towards their retirement.

There are a number of investment vehicles available for you to make investments on behalf of your children. If they are earning an income of their own you can contribute to either a traditional or Roth IRA on their behalf. Many brokerages will also allow you to open an account for your child directly or you can establish a trust.

There are some obscure and none too parent friendly IRS rules regarding withdrawals and investment income so you should be sure to research those implications when making investment choices for your children. If you’re making long term (e.g. retirement) investments on their behalf there are fewer short term implications to your investment choices. However, the best investment vehicles at this point for retirement savings for children (IRAs) require the child earn an income and putting your 6 month old to work will probably raise a few flags with the IRS!