How to kickstart a young person's retirement

CHICAGO (Reuters) – When the Vondruska family gathers in Watersmeet, Michigan on Christmas Eve to open presents, the grandchildren will not be ripping open any packages from their grandparents.

FILE PHOTO: Graduating seniors line up to receive their diplomas during Commencement at Wellesley College in Wellesley, Massachusetts, U.S., May 26, 2017. REUTERS/Brian Snyder/File Photo

Instead, George and Susan Vondruska will hand their three granddaughters, who are in their early 20s and working, notes that say they now have Roth IRAs worth $5,000 each.

“Think of how large this can be if they retire in 45 years,” said George Vondruska.

It could be quite large, indeed.

That initial lump sum could become more than $150,000 for each granddaughter at retirement. That assumes an average annual return of 8 percent on a portfolio about 82 percent in U.S. and international stock index funds and the rest in bond funds.

The grandparents picked Roths because they are such a powerful retirement savings vehicle. The growth is never taxed if invested until at least 59½. A person needs to have earned income to qualify each year for the contribution, with a limit of $5,500 for 2018. But the IRS does not actually see who puts the cash into the account.

Parents or grandparents who already have their own retirements squared away are incentivizing young people to save by starting the accounts as soon as the kids have earned income from a job – even babysitting or lawn mowing.

Here is what you need to know about seeding a Roth for the young people in your

Keep reading this article on Reuters Personal Finance.