From Here to Financial Happiness

Day Fifty Four Compounding for Life

Back on day 6, we discussed compounding. At the time, I noted that, if you invested $1,000 and earned 6% a year, you would have $5,743 after 30 years. But what if the $1,000 was left to grow for twice as long – and what if that growth was tax‐free? After 60 years, you would have $32,988 to spend in any way you wish.

That brings me to one of the great financial gifts you can make to teenagers or those in their twenties. If they have earned income – meaning they have a job that's paying them income – help them to fund a Roth IRA. The maximum contribution is either their annual earnings or that year's legal limit ($5,500 in 2018), whichever is lower. With a Roth, there's no upfront tax deduction. But in return for giving up that immediate tax break, you get not‐tax‐deferred growth – meaning the money will eventually be taxed – but rather tax‐free growth.

A teenager could easily get six decades of tax‐free growth out of a Roth, and perhaps more. And if you get the Roth opened, your favorite teenager might continue to contribute every year – and the account could be worth well over $1 million by retirement. Keep in mind that if someone's income is too high, he or she can't fund a Roth, but that's unlikely to be an issue for young adults early in their career.

Want to make sure your teenager has some skin in the game? You could make this offer: You'll contribute a dollar for every dollar the teenager contributes. If that seems too onerous, you ...