How do I build a financial portfolio for my children without affecting their tax liability?

With WBEZ, we’re gathering your questions about all things money and finances. Each week, we bring you answers from people who know best.

This week, John of Norwood Park asked:

Consider a custodial Roth IRA

A great way to help set up your children for financial success is by opening a custodial Roth IRA, according to Chicago entrepreneur and financial educator Ross Mac.

Custodial Roth IRAs are managed by a parent or guardian until a minor child can gain full control of the account. There's no minimum age requirement to have a custodial Roth IRA as long as your kids bring in an income from, say, a summer job or babysitting.

"The great part about it is they have the ability to invest up to $7,000 per year," Mac said. "And that money is after-tax dollars. Therefore, it's going to grow tax-free, and that can be withdrawn tax-free at retirement. ... It's not going to mess up their financial aid. This account does not count against your child's FAFSA formula unless they make withdrawals during college."

Another plan Mac recommends is the 529 College Savings Plan, which can grow tax-free. Families can use it to help save for education expenses. In Illinois, the maximum account balance is $500,000, according to Bright Start 529, which is administered by the Illinois treasurer's office.

Compound interest is your friend

"The earlier you begin investing, the higher likelihood you're going to take advantage of compound interest," Mac said. "So, for my children, they have all of these accounts set up, and we are investing in them every month."

He suggests buying into the S&P 500, a stock market index tracking the country's top 500 companies, that has an average annual return of about 10%.

"I want everyone to know — Google it, and learn it — the rule of 72, which literally shows you how often it takes for your money to double," Mac said. "So, if you're starting at year 1 and say you just start with $100,000 — obviously, that's aggressive — but I want you to know that by year 7 your investment in the S&P 500 would go to $200,000. And, by year 14, that $200,000 will go to $400,000 ... and so forth. So when your child gets ready to retire they're going to have a phenomenal cushion."

Teaching financial literacy

"Don't go about your own financial journey for your child silently," he said. "I think it's very important that we talk about money with our children so that they themselves develop a good relationship with money."

Mac said research shows that, by the time kids are 7 years old, they form money habits. It's why he wrote the children's book "ABC's for Future Millionaires."

"I talk to all my children about money and investments," he said. "And, sure, they're only 4, 3 and 2, but I do believe that financial literacy is its own language. And therefore the earlier I begin speaking to my children about it, they'll become fluent in it."

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