I have written often on the effects of compounding over the long term, emphasizing the simple but potent message that the sooner you start, the more the multiplying effect you will experience in your investments. That’s why it makes so much sense to help your children take advantage of the benefits of compounding within a Roth IRA.

Under current law, qualified Roth IRA distributions are not taxed, no matter how much income is reported on the taxpayer’s tax return. Anyone with earned income can have a Roth IRA, even a child.

You might consider hiring your children or grandchildren to do work around the house, or, if you run a business or a professional practice, you can hire them there. The younger the kids are, the better. You’ll not only cut your own taxes today, but you’ll set the kid on a path that could lead to a multi-million-dollar retirement fund decades down the road.

The premise is simple. Money you pay the youngsters reduces your business income and thereby your income taxes. The children will owe little or no tax, which you can pay for him or her, while fully funding their Roth IRAs.

Miracle of Compounding Creates Multi-Million Dollar Wealth

Suppose that you hire your child. If he earns at least $5,500 a year, that much could be invested in his Roth IRA. (You could pay a bit more in order to cover any payroll taxes.). If he works for your business for 10 years and your business makes no further payments to him after that, he would have contributed $55,000 to his Roth IRA.

How much that investment would be worth at the end of those 10 years depends on the rate of return during that period. To get an idea, we built models to calculate returns of 6%, 8%, and 10%.

Are these returns realistic? ’s Ibbotson subsidiary tracks investment returns going back to 1926. Through 2013, large-company stocks returned 10.1% a year. Shorter durations could be much lower or much higher. Our illustrations are assuming that we are going to be invested for the very long term.

Using our three models, we figured that the $55,000 total invested would be worth $74,669 at the end of 10 years at 6%, $82,863 at 8%, and $92,039 at 10%. Keep in mind that the full $55,000 was invested for only half the time, on average. (In the first year only $5,500 was invested and in the second, only $11,000, etc., so on average only $27,500 was invested for the full ten-year period.)

But the seemingly magical effect of compounding is only just beginning! Those first years are just to get the wheels rolling.

Let’s assume an 8% average annual return inside the Roth IRA, doubling every nine years (using the Rule of 72). The initial $55,000 ($5,500 invested every year for 10 years) would be worth about $3,831,415 after another 50 years, and if the average annual return were to be 10% per year, that figure would be $10,749,493. That’s the power of compounding.

Again, how reasonable are these calculations?  Even during the past 10 years, which included the “Great Recession,” the S&P 500 returned an annualized 7.98% and, over the past five years, an annualized 12.79%. As you can see, market returns vary from year to year, but over very extended periods, the broad averages seem to average out to be around 10% or better. If you can allow investments to compound over long periods of time at such average annual returns you will have amazing results!

Keep in mind that the multi-million dollar portfolio we calculated was achieved without any further investments after the first 10-year period. And if your child were able to continue to fund his or her Roth IRA account, the tax-free Roth IRA buildup is likely to be even more overwhelming.