Tax me now! Tax me later! Tax me never! Interview with expat financial planner Jimmy Miller

Prologue: In search of a tax haven …

Where to find that tax haven – let’s start with a ROTH IRA

The above tweet from CPA Gary Garter leads to a discussion that includes:

Want to jump start your child’s retirement with a million dollar tax-free account? Consider this:

The million dollar idea

As soon as your child begins to earn income, open a Roth IRA and set a contribution goal to reach before they graduate from high school. Assuming an 8% expected rate of return, the investments made by age 19 will grow to FORTY times its value by the time they reach 67 (current full retirement age). For example, $2,500 invested before graduation will be $100,000 at retirement. If you can bump that up to a $25,000 investment before graduation, at retirement it will be worth $1 million!

Why it works

Compounding interest occurs when interest is earned on the interest generated from the initial contribution. The more time the investment has to grow, the more exponential growth will occur. By starting to save prior to graduating from high school, the investment will have almost fifty years of compounding growth.

Even better, while contributions to Roth IRA’s must be after-tax contributions, any earnings are TAX-FREE as long as the rules are followed! Simple to say, but how do you get $25,000 into a child’s Roth IRA? Here are some tips.

Tips to achieve the goal

Hire your child. Roth IRA contributions are limited to the amount of income your child earns, so earned income is key. If you own a business or even make some money on the side, consider hiring your child to help with cleaning the office, filing or other tasks they can handle.

Look for acceptable young-age work ideas. Babysitting, yard work, walking pets, shoveling, and lawn work are all good ideas to get your child earning income at a younger age. Cash-based income is harder to prove, so don’t forget to keep track of the income and consider filing a tax return, even if not required.
Leverage high school years. Ages 15 through 18 will be when your child has their highest earning potential before graduation. Summer jobs, internships and part-time jobs during the school year can produce a consistent income flow to contribute to their Roth IRA and still provide spending money.

Parent or grandparent matching idea. The income earned by your child doesn’t have to be directly contributed by them to the Roth IRA – it simply sets the contribution limit. Make a deal that for every dollar of income your child saves for college, a parent or grandparent contributes a matching amount to their Roth account. It can be a college and retirement savings in one!
By helping your child get a head start on saving, it should ease any anxiety regarding retirement and help them focus on school, starting their career, and other personal development goals.

Category: Retirement

Published: 02/25/2022

More About The ROTH IRA or Canadian TFSA provide tax free growth!!

As part of my AmeriPREP Wealth series I continue to explore financial strategies for Americans abroad. I recently had the opportunity to chat with Jimmy Miller – author of “Divorce The IRS”.

Jimmy is a wealth of good ideas and wisdom. He thinks about investing in three categories:

1. Tax me now: Individuals who take their “after tax” money and invest it in a brokerage account. The investments in the account generate income which is taxed as the income is realized.

2. Tax me later: Examples would include a basic 401K, basic IRA, Canadian RRSP or basic pension plan. The money is invested before tax is paid, income grows tax free in the plan and then the income is taxed when distributed.

3. Tax me never: Examples include the ROTH IRA, Canadian TFSA or UK ISA. Of course US citizenship can present a problem for Americans abroad …


John Richardson – Follow me on Twitter @Expatriationlaw

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