Tick, tock. Tick, tock… the seconds keep clicking away towards April 15th. And then,… and then it will too late.

Parents may not realize it, but they might be letting a tremendous opportunity slip through their fingers – establishing a Child IRA for their children (see “The Fiduciary Parent – The Ultimate Plan Sponsor Shouldn't Overlook this Familiar Tool,” FiduciaryNews.com, February 26, 2019).

I'm in the middle of a national radio tour talking to audiences all over the country about the benefits of establishing a Child IRA. When I explain the simple math they're blown away.

By saving in a Child IRA as little as the equivalent of a weekly latte from the moment a baby is born until its 19th birthday, that child will retire at age 70 with $2.25 million. That doesn't include any additional retirement savings.

Here's a few interesting points about the Child IRA brought up by those radio hosts from coast-to-coast:

“The idea sounds too good to be true.” Yep, it's unbelievable, but not the way you expect. The numbers assume an 8% growth rate. That's actually 3% LESS than the actual historic long-term return.

If you want something truly unbelievable, put in the real historic return rate (11%). That two-and-a-quarter million dollars balloons to $14 million. Now that really sounds too goo to be true. But it isn't.

“If it's such a great idea, why isn't everyone putting their kids' earnings into Child IRAs?” Excellent question. Why ISN'T everyone doing it? More important, who is doing it?

It turns out many (but not all) of the parents who have established Child IRAs work in the financial services industry. These are the people most familiar with the benefits of the Child IRA. And they're using them.

“I thought child labor laws prevented kids from working until their teenagers.” Yes, but no. While it's true such laws exist, they don't apply to every situation. For example, there's no reason why children – no matter their age – can't sell lemonade curbside in the local neighborhood. Younger children mow lawns, babysit, and perform any number of menial tasks for friends, neighbors, and family members.

These juvenile entrepreneurs earn spending cash that qualifies for a Child IRA contribution. But there's possibly an even bigger exception to federal child labor laws. Parents who own businesses aren't necessarily barred from hiring their pre-teen children.

“My kid only made a few hundred dollars. That's too little to start a Child IRA.” Sure seems so, doesn't it? I mean, most parents are putting thousands of dollars into their own 401(k) plans. What's a few hundred bucks in the grand scheme of things?

Turns out to be a pretty big deal. A twelve-year-old who places $500 in a Child IRA will see those few hundred dollars grow to more than $43,000. That still might not impress, but now imagine stringing together a bunch of $500 over several years. It's not hard to see that $43,000 begin to approach a million dollars. Now that's a scheme that's certainly grand.

“What if I don't start a Child IRA the first year my child is born? Can I catch up for lost years?” Most definitely yes. Our “one latte a week” assumption translates to $1,000 a year. The IRA contribution limit (beginning in 2019) is $6,000, so there's a lot of room to catch up.

In fact, a child can end with roughly the same amount ($2.5 million) just by making the maximum contribution only in their pre-college teenage years. That's six years from age 13 through age 18 putting in $6,000 a year.

“The Child IRA really sounds great, but my kids already spent all the money they earned.” Not to worry. Mom and dad (or the grandparents) can gift the amount needed to establish a Child IRA for up to the amount the child earned or $6,000 (whatever is less).

Parents with working children have until April 15th to open up a Child IRA for their kids. It doesn't matter how small that Child IRA is at the beginning.

The power of compounding compels them.

This is like a turbo-charged Child IRA — Carosa

Solving the 'my retirement or my kids' education' dilemma — Carosa

Instant Insights /

Parents have only a few more weeks to make this difference for their kids – Carosa

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