Make your kid rich on $1/day for 18 years—how to do?

[MrThatsDifferent]

Hi, I’m fascinated by this article: https://paulmerriman.com/make-your-kid-rich-for-1-a-day/

And I’m curious, how do you do this for a kid? I’m not talking 529 per se because that’s limited to educational expenses. But how would you set up an investment account for a kid, put in, say $500 each year on their birthday for 18 years, then the kid transfers just $5500/year for 4 years into an IRA?  I’m a bit confused by the mechanics, can anyone break this down into a how to guide? I’ve just had a niece and would like to see her parents set this up and I contribute on her bday.

Also, reading this, if you missed out and gave your kid $36k to invest at 24, and they don’t touch until 66, would the result be the same?

Thanks in advance.

[MrBojangles]

How about just depositing $1000 in an index fund the day your child is born with the stipulation that it not be touched until their 70th Birthday.  Very little pain on your part, a real gift for your kid when he or she is certainly mature and it had plenty of time to grow.

[effigy98]

12% a year... good luck with that. Maybe make it $2 a day.

[Abe]

The easiest way to do this

1. Set up a Roth IRA account that you put the money in at some schedule you choose. Keep in mind that since it is not a 529 account, those contributions will count towards your total $5500/yr contribution limit.
2. With $1/day contribution and more realistic, inflation-adjusted numbers (SP500 inflation-adjusted average capital gains + dividend returns of 7%), you will end up with $13,000.
3. Once the child is 18, they can set up a Roth IRA if they have earned income, and you can transfer the accumulated money to them. Since you put the money in a Roth IRA, there is no tax on withdrawal and there is no tax on the gift for either party. They do have to have earned income in order to set up an IRA, and the amount contributed to the IRA cannot be more than this income. It may thus take 2-3 years to get it transferred.
4. Regarding realistic long-term expectations (again using 7% SP500 inflation-adjusted returns), they'll have around $400k in 50 years.


We're going with a 529 plan because we can't contribute to a Roth IRA or deduct tIRA contributions, and we're contributing significantly more up front to take advantage of compound interest.

[MrThatsDifferent]

The easiest way to do this

1. Set up a Roth IRA account that you put the money in at some schedule you choose. Keep in mind that since it is not a 529 account, those contributions will count towards your total $5500/yr contribution limit.
2. With $1/day contribution and more realistic, inflation-adjusted numbers (SP500 inflation-adjusted average capital gains + dividend returns of 7%), you will end up with $13,000.
3. Once the child is 18, they can set up a Roth IRA if they have earned income, and you can transfer the accumulated money to them. Since you put the money in a Roth IRA, there is no tax on withdrawal and there is no tax on the gift for either party. They do have to have earned income in order to set up an IRA, and the amount contributed to the IRA cannot be more than this income. It may thus take 2-3 years to get it transferred.
4. Regarding realistic long-term expectations (again using 7% SP500 inflation-adjusted returns), they'll have around $400k in 50 years.

Thank you @Abe !

A couple questions (I’m not too bright with this stuff)

So, her parents have to set up the Roth IRA? I don’t work or live in the US. I was going to give it to them to deposit but don’t want them spending it.

So, she gets a job at 18 and then contributes $5,500 to her own Roth IRA and then we can match that with $5,500 from what we’ve save for her each year until it’s all transferred and then she can just let it sit or keep adding to it?

Do you think this makes more sense than a 529? What I do like about the 529 is that it has to be used for education and her parents can’t use it for themselves. What I like about this Roth IRA is that she can use it later in life for other things.

[Abe]

No problem!

1. Ah, you don't work in the US so cannot open a Roth IRA. In this case you have two options:

1a. Save money in a taxable account, then transfer to the kid's Roth IRA once they have income and can set one up. If she's <18 when earning money (hopefully the case!), it'll be a custodial account controlled by a parent. This is a somewhat cumbersome process whose only advantage over a 529 account is that the money can be withdrawn for any use, not just education.

1b. If you're specifically interested in funding for her education, then use a 529 account, which will be a custodial account set up in her name and you can contribute whatever amount with no limit, regardless of the child having income or not.

2. Correct. The total that can be contributed per year to a Roth IRA is $5500. You can transfer her $5500 to compensate for the $5500 she puts in the Roth IRA.

3. I prefer a 529 account for a few reasons:
- There is no income requirement, so it can be opened now.
- This allows earlier contribution with longer time for tax-free growth
- With the new tax law, this money can be used for any education expenses from Kindergarten onwards. It's almost impossible to have $0 education expense in the US, so unlikely the tax advantage will be "wasted". Also, if she gets a full scholarship for college, the money can be withdrawn penalty-free for other expenses. If she becomes disabled such that she cannot attend college, it can be transferred without penalty to a different tax-advantaged account for healthcare costs.
- Earned income in a 529 plan carries less penalty when calculating financial aid (under current rules, who knows what it will be in 18 years).
- The beneficiary in a 529 plan can be changed to a sibling if so desired.

In summary, I recommend going with a 529 account.

[MrThatsDifferent]

No problem!

1. Ah, you don't work in the US so cannot open a Roth IRA. In this case you have two options:

1a. Save money in a taxable account, then transfer to the kid's Roth IRA once they have income and can set one up. If she's <18 when earning money (hopefully the case!), it'll be a custodial account controlled by a parent. This is a somewhat cumbersome process whose only advantage over a 529 account is that the money can be withdrawn for any use, not just education.

1b. If you're specifically interested in funding for her education, then use a 529 account, which will be a custodial account set up in her name and you can contribute whatever amount with no limit, regardless of the child having income or not.

2. Correct. The total that can be contributed per year to a Roth IRA is $5500. You can transfer her $5500 to compensate for the $5500 she puts in the Roth IRA.

3. I prefer a 529 account for a few reasons:
- There is no income requirement, so it can be opened now.
- This allows earlier contribution with longer time for tax-free growth
- With the new tax law, this money can be used for any education expenses from Kindergarten onwards. It's almost impossible to have $0 education expense in the US, so unlikely the tax advantage will be "wasted". Also, if she gets a full scholarship for college, the money can be withdrawn penalty-free for other expenses. If she becomes disabled such that she cannot attend college, it can be transferred without penalty to a different tax-advantaged account for healthcare costs.
- Earned income in a 529 plan carries less penalty when calculating financial aid (under current rules, who knows what it will be in 18 years).
- The beneficiary in a 529 plan can be changed to a sibling if so desired.

In summary, I recommend going with a 529 account.

Thank you!

[ROF Expat]

Does your niece live in the United States?  If she's not at least resident in the US, the specifics of the 529 and IRA obviously won't apply. 

That said, the real point of the Merriman article is only that a small amount of money, invested early in life in the broad US market and left to grow will become a very significant amount of money six or seven decades down the road.  Whether you put the money in a 529 or an IRA doesn't really matter much (in the US context, at least).  If you don't trade any of the shares (which you wouldn't in this plan), there would be no tax liability until withdrawals start.  I have no idea what capital gains taxes will look like then, but they are currently lower than most income tax rates.  Of course, YMMV in Australia. 


You can replicate the plan simply by investing a few thousand dollars in an index fund and giving it to your niece as a gift.  You don't really have to make it more complicated by using vehicles like a 529 unless you want to.  The key is that your niece has to have the discipline to leave the money untouched.  And if your niece isn't going to live in the US forever, you could probably do the same thing in an Australian fund.  My understanding is that the historic return of the Australian market has been very good. 

The one thing that nobody (including the article) has mentioned is the importance of low fees.  Transaction fees and ongoing fees of various kinds (including the more or less hidden mutual fund management fees) can have a very large impact on long-term performance.  A transaction fee or annual fee of even $20 or $50 will have a hugely negative impact on an investment of only $365 per year.  In fact, fees of about $44 would completely nullify the projected/hoped for 12% growth the first year.   So you'll want to find a company and fund that feature extremely low fees and expense rations.  Vanguard pioneered the low cost investing model and is popular among the MMM set (for very good reasons).  I think they have an Australian branch, too. 

[MrThatsDifferent]

Does your niece live in the United States?  If she's not at least resident in the US, the specifics of the 529 and IRA obviously won't apply. 

That said, the real point of the Merriman article is only that a small amount of money, invested early in life in the broad US market and left to grow will become a very significant amount of money six or seven decades down the road.  Whether you put the money in a 529 or an IRA doesn't really matter much (in the US context, at least).  If you don't trade any of the shares (which you wouldn't in this plan), there would be no tax liability until withdrawals start.  I have no idea what capital gains taxes will look like then, but they are currently lower than most income tax rates.  Of course, YMMV in Australia. 


You can replicate the plan simply by investing a few thousand dollars in an index fund and giving it to your niece as a gift.  You don't really have to make it more complicated by using vehicles like a 529 unless you want to.  The key is that your niece has to have the discipline to leave the money untouched.  And if your niece isn't going to live in the US forever, you could probably do the same thing in an Australian fund.  My understanding is that the historic return of the Australian market has been very good. 

The one thing that nobody (including the article) has mentioned is the importance of low fees.  Transaction fees and ongoing fees of various kinds (including the more or less hidden mutual fund management fees) can have a very large impact on long-term performance.  A transaction fee or annual fee of even $20 or $50 will have a hugely negative impact on an investment of only $365 per year.  In fact, fees of about $44 would completely nullify the projected/hoped for 12% growth the first year.   So you'll want to find a company and fund that feature extremely low fees and expense rations.  Vanguard pioneered the low cost investing model and is popular among the MMM set (for very good reasons).  I think they have an Australian branch, too.

Yes, she’s in the US. I have a Vanguard Aus account. If I open something for her, won’t it get co-mingled with mine?  Also, I wanted something the family could contribute to as she grows.

[Unique User]

You can open a Roth IRA for a minor and it will show on your summary page since you would be the custodian.  The rules are that you can deposit up to $5,500 (of whatever yearly limit) of any of their earned income, even cash from mowing lawns or babysitting, you just have to have the records to prove.  Since they are in the US it is against their earned income, not yours. My 17 year old had a job all of 2018 and I opened a Roth for her in December and deposited in the max.  It transfers to her at 18, but I've also told her she can't touch it until 59.5 since she's kind of a spendy teen and I'd be concerned if she knew she could withdraw contributions at any time. 

[ROF Expat]

Does your niece live in the United States?  If she's not at least resident in the US, the specifics of the 529 and IRA obviously won't apply. 

That said, the real point of the Merriman article is only that a small amount of money, invested early in life in the broad US market and left to grow will become a very significant amount of money six or seven decades down the road.  Whether you put the money in a 529 or an IRA doesn't really matter much (in the US context, at least).  If you don't trade any of the shares (which you wouldn't in this plan), there would be no tax liability until withdrawals start.  I have no idea what capital gains taxes will look like then, but they are currently lower than most income tax rates.  Of course, YMMV in Australia. 

You should be able to open some kind of custodial investment account in the US, and an IRA when there's earned income.  I can't speak to Australia, but I'm confident you wouldn't have to mingle your funds/accounts. 


You can replicate the plan simply by investing a few thousand dollars in an index fund and giving it to your niece as a gift.  You don't really have to make it more complicated by using vehicles like a 529 unless you want to.  The key is that your niece has to have the discipline to leave the money untouched.  And if your niece isn't going to live in the US forever, you could probably do the same thing in an Australian fund.  My understanding is that the historic return of the Australian market has been very good. 

The one thing that nobody (including the article) has mentioned is the importance of low fees.  Transaction fees and ongoing fees of various kinds (including the more or less hidden mutual fund management fees) can have a very large impact on long-term performance.  A transaction fee or annual fee of even $20 or $50 will have a hugely negative impact on an investment of only $365 per year.  In fact, fees of about $44 would completely nullify the projected/hoped for 12% growth the first year.   So you'll want to find a company and fund that feature extremely low fees and expense rations.  Vanguard pioneered the low cost investing model and is popular among the MMM set (for very good reasons).  I think they have an Australian branch, too.

Yes, she’s in the US. I have a Vanguard Aus account. If I open something for her, won’t it get co-mingled with mine?  Also, I wanted something the family could contribute to as she grows.