Turn Your Kid Into A Millionaire Without Winning The Lottery

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Set up an early Roth IRA to begin establishing wealth.

Many physicians find it tough to save for retirement because of the many financial obligations that occur when raising children. Imagine then how difficult it is to convince your teenage children to save for retirement rather than upgrading to the newest iPhone. What if you turned this conversation around and told them “I’ve got a plan to make you a millionaire!” They would probably think you’re crazy, but there’s a great way you may be able to make that happen: by funding a Roth IRA. I’m not talking about funding your Roth IRA. I’m talking about funding your child’s Roth IRA.


Roth IRA Basics

Direct contributions to a Roth IRA are not tax deductible and the earnings on the contributions do not incur current year income taxes much like a 401k. The biggest advantage is that when you withdraw money from a Roth IRA, both the contributions and the earnings are not taxable as long as you meet certain requirements. For the earnings portion you usually need to have the account open for at least five years and turn age 59.5 so that the earnings are not taxable and to avoid a penalty, though there are some exceptions.

Roth IRA Eligibility


If you’re filing status is single then your income must be below $137,000 in 2019 in order to be eligible to make Roth IRA contributions (income below $203,000 if married). The key here is that you must have earned income to contribute to a Roth IRA. This includes your child – there is no age limit to making Roth IRA contributions, but he or she must have earned income in order to contribute to his or her own Roth IRA.

So if your teenage son works at fast food places, or your daughter generates some income from babysitting, they can both open a Roth IRA and make contributions. In these situations, their income is so low that they likely won’t be subject to any federal income tax. You just want to make sure you keep good records to document their income. This is the reason why the Roth IRA is superior over a traditional IRA – they don’t need the tax deduction from making contributions to a traditional IRA.

The Power of the Roth

How does the Roth turn your child into a millionaire? It comes down to good old fashioned saving and compounding.


Let’s say your son just turned 16 and got his first job at a car wash and generated $7,000 of income as a part time employee for the year. He’ll still pay Social Security and Medicare taxes on that income, but won’t be subject to federal income tax. The earned income allows him to make a maximum Roth IRA contribution of $6,000 this year.

Additionally, let’s assume that he continues generating that level of income or more (but below the income thresholds for Roth IRAs) for the next 10 years as he finishes up high school, goes through college, and starts working a job and generating income straight out of college. He also continues to save $6,000 per year into the Roth IRA.

Assuming a 7% average annual return then he’ll have about $82,000 in his Roth IRA at age 25. Now that doesn’t sound like a lot and it’s nowhere near millionaire status, but let me ask you – what was your retirement account balance at that age? I bet it was close to $0 just like mine was because we were clueless about investing during our grueling residency years.

But hang on my friend.

Now let’s say he stops making contributions altogether and his Roth continues to generate average annual returns of 7%. At age 65 he would have over $1 million in that account! Of course this doesn’t account for inflation, but that’s still pretty impressive. I’ve met a number of physicians who’ve been working for a long time and still aren’t millionaires at age 65 (can you say poor planning?).

Opening and Investing the Roth IRA

OK so you’re kind of convinced now and you want your child to fund a Roth IRA. Many custodians allow you to open a Roth IRA for minors. You as the responsible adult would need to sign the account application, but other than that it’s not much different than opening your own Roth IRA.

Because your child is so young and has many years until he’ll withdraw money from the Roth IRA, it should be invested 100% in stocks. Just make sure to diversify that account just like any other account or portfolio – in other words don’t buy penny stocks.  There’s almost no reason to own bonds in the Roth IRA at that age.

Other Advantages

Let’s face it. If your teenager works and generates income, he or she will want to spend it. So what you can do is make them a deal – you will gift them half of the Roth IRA contribution, they contribute the other half, and they can spend the rest. Going back to the example, if your kid makes $7,000 income, then you gift $3,000 to his Roth IRA, he makes his own $3,000 Roth IRA contribution for a total $6,000 Roth IRA contribution, and he spends the rest ($4,000). This allows you to create an annual gifting program for them to get some assets out of your estate. At the same time it hopefully creates a habit of regular saving at a young age.

Be Aware

Before opening a Roth for your child, just keep a few more things in mind:

  1. Your child must have earned income from some type of employment. You can’t just open and fund a Roth without taxable income generated by your child. Penalties could apply if the IRS determines the funds contributed to a Roth IRA were not compensation income.
  2. Documentation of income is essential — especially if your child generates income in a way that is not reflected on a W2 or 1099.
  3. When your child reaches the age of majority – usually age 18 – he has full control over the Roth IRA and could potentially withdraw the money. Direct contributions to Roth IRAs can be withdrawn at any time without tax or penalty so if you’re not sure if he can handle money at that age, you may want to reconsider opening an account in his name. Imagine a scenario where you gifted money into your child’s Roth IRA and then he withdraws the money to celebrate his 21st birthday in Vegas. In that case keep your fingers crossed and hope that he hits the jackpot.

As you can see the Roth IRA has a number of benefits for you and your child. While it may be tough to have them think about their financial futures instead of playing video games, they’ll hopefully thank you when they become responsible adults.


Setu Mazumdar, MD, CFP® is board certified in EM and is the president of Physician Wealth Solutions Inc., a wealth management firm helping physicians with financial planning and investment management.

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