Greg M. Ostroff, CFA Start Now Start Now · Part 11. A free book, published one piece at a time: how ordinary earners build lasting wealth and financial freedom. New here? Start here → A quick note on who this chapter is for. Everything else in this book is written to you, the person doing the saving. This chapter is the exception: it’s the one worth sharing.If a parent, grandparent, or other relative is in a position to help, funding your Roth is one of the most powerful gifts they can give, and often they simply don’t know it’s possible. So read it to understand the strategy, and if it fits your family, pass it along to the person who might help. What follows speaks to that giver, but the person who benefits is you. Everything in this book points to the same conclusion: the earlier money goes into a Roth, the more time it has to compound. One lesser-known way to act on that is for anyone in a position to help, a parent, grandparent, or other relative, to give a young American the cash to fund a Roth they might not otherwise prioritize.It is a simple, legal, and powerful way to help the next generation start early, and it costs the giver very little in tax terms. The most common case: a young adult just starting out. Case Study · Emma, 22 Emma is 22, a working musician with gig income, no steady employer, and certainly no 401(k). She’s stretched, covering rent, gear, and the cost of becoming independent, and she assumes retirement saving can wait, because there’s simply no room for it now. But she’s earning, which is all a Roth requires, so her grandfather John funds one for her, to compound for fifty years, long before she’d have thought to start herself. Yet those early years are the highest-leverage ones in this entire book: a dollar saved at 25 has the longest runway to compound, and that window never comes back. A parent’s or relative’s gift lets a young person capture those irreplaceable years without sacrificing the independence they are building. They keep their own paycheck for living expenses while the gift funds the Roth. And because it grows inside a Roth, the government never takes a share of what it becomes. Once the young person is more established, they take over the contributions themselves and carry the account for the next thirty or forty years. It is a modest gift that decades of tax-free compounding can turn into a fortune. The core move turns on a simple fact: money is fungible. You can give the young person cash and let them make the contribution, or you can help them by contributing directly: the IRS does not care where the dollars came from, only that the contribution stays within the limits below. The practical effect is that your gift funds the Roth while the young person’s own paycheck stays in their pocket. The one change worth making There’s a quiet reorder hiding in this. Families who give often default to the easy thing: cash that gets spent, or a plain savings or brokerage account, to keep it simple. The better move is to fund the Roth first. Put in up to what the young person earned that year, and only then send anything left over wherever else you like. The size of the gift matters far less than the order: even a small amount, routed into a Roth early, becomes the most valuable dollar you could give. It’s the gift most people don’t realize they’ve been giving backwards. The one binding constraint is earned income. This is the rule that trips people up. To contribute to a Roth, the recipient must have earned income (wages, salary, or self-employment income) for the year, and the contribution is capped at the lesser of the annual limit ($7,500 in 2026 for those under 50) or their total earnings16. So a young person who earned $4,000 can contribute at most $4,000, no matter how large the gift. Someone with no earned income cannot contribute at all that year. Allowances, investment income, and the gift itself do not count as earned income. The gift sits well within tax-free gift limits. For 2026 you can give up to $19,000 per recipient ($38,000 for a married couple who split the gift) without using any of your lifetime gift and estate tax exemption or filing a gift tax return17. Since a full Roth contribution is $7,500, a gift to fund one sits comfortably inside the annual exclusion. Why it is worth knowing. One $7,500 gift, made at age 20 and never touched, passes half a million dollars by 75 even at the floor, about $174,000 in today’s purchasing power. The age at which it is given changes everything. Three such gifts, at 20, 21, and 22, $22,500 in all, reach $1.4 million at the floor: nearly $500,000 in today’s dollars, twenty-two times the money given. That would be the worst case the market has produced on record. At the long-run average, the same three gifts reach nearly $4 million, about $1.3 million in today's dollars, fifty-nine times the gift. For a family, it is among the most efficient and powerful ways to pass wealth along. The gift is small enough to be tax-free to the giver, and every dollar of growth it produces is tax-free to the recipient. Roth assets generally pass to heirs tax-free as well, as Section 2 noted. A single $7,500 contribution, held to age 75, shown in nominal dollars and in today’s purchasing power (2% inflation). Every dollar of it tax-free, from one contribution. Notice the rule hiding in the table: every five years of delay costs about a third of the result. Twenty to twenty-five, twenty-five to thirty, thirty to thirty-five. Each five-year wait gives up about a third of what the gift would have become, roughly 32% less at the 8% floor and 38% less at the 10% average. The exact percentage moves with the return you assume, but the compounding logic behind it does not. Emma is seventy-five. The gigs came and went; the account did not. The single $7,500 contribution John made for her, in a year she could not have spared the money herself, is worth about $1.2 million at the long-run average and about $443,000 even at the worst case the market has ever produced. That is about $410,000 and $155,000 in today’s purchasing power, every dollar of it tax-free.30 John spent $7,500 once. What he actually gave her was fifty-three years, which is the one thing in this book that cannot be bought later. What if the young person is a minor? A working minor with a part-time or summer job can still have a Roth: a parent or guardian opens a custodial Roth IRAand funds it up to the minor’s earned income, with control passing to the child at the age of majority in their state. Either way, keep a simple record. Because the contribution depends on earned income, it is worth documenting what the young person earned: a W-2, or for informal work like babysitting or yard work, a note of who paid what and when, in case the contribution is ever questioned. What about 529 plans and 530A accounts? Two other accounts come up when people talk about saving for a child, and both are worth a moment, if only to see why the Roth still wins. A 529 plan takes after-tax money, grows it tax-free, and pays out tax-free, but only for qualified education, such as tuition. Spent on anything else, the earnings are taxed and penalized. It’s an excellent tool for financing higher education, but it does nothing for retirement. However, leftover 529 money can now be rolled into the child’s Roth, within limits. That makes it a useful bridge between the two. A 530A account (also known as a Trump account), created in 2025, is newer and more flexible. The federal government seeds one with $1,000 for every U.S. child born from 2025 through 2028, and families can add up to $5,000 a year. The money sits in low-cost, broad stock index funds: index investing by design. But watch the tax treatment. Contributions go in after tax, the account grows tax-deferred, and at 18 it converts to a Traditional IRA, so the gains are eventually taxed as ordinary income on the way out.18It is, in effect, a nondeductible Traditional IRA for children, and it carries the exact disadvantage this book keeps returning to: you pay tax on the growth at the end. Set the Roth beside them and the contrast is clean. The Roth is the only one of the three in which a lifetime of growth and every dollar withdrawn are completely tax-free, for any purpose in retirement, no education requirement, no ordinary-income tax on the gains. Its one condition, that the child have earned income, is exactly what makes the gift-funding strategy in this chapter work. So claim the free $1,000 if your child is eligible, use a 529 if school is the goal, but for a young person with earned income the smartest long-run home for the money is still the Roth. One caveat cuts the other way. Because a Roth requires earned income, it isn’t available to a young child who can’t yet work, and that’s where a 530A account earns its keep. The free $1,000 is worth claiming for any eligible newborn, and tax-deferred growth in a low-cost index fund still beats a plain taxable custodial account, where gains are taxed along the way. Think of it as a bridge: the 530A account (or a 529) for the youngest children, and the moment a real paycheck arrives, a summer job, say: that’s the signal to start funding a Roth. Note A note of caution This is a general illustration, not tax advice. Edge cases (self-employment income, the “kiddie tax,” whether the young person is claimed as a dependent, and state rules on custodial accounts) can complicate the picture. The kiddie tax, for example, never touches the Roth itself; it applies only to investment income in a taxable or custodial account. A short conversation with a CPA before acting is wise. So, Grandma, skip the socks We all like socks from Grandma in the Christmas stocking, but they won't last a lifetime and they won't make anyone a millionaire. Ask for a Roth IRA instead. It's the one gift that's still growing fifty years after it's opened, and the most valuable thin
