I’m Turning the Child Tax Credit Into an $8 Million Dollar Retirement Fund for My 2-Year-Old. Here’s How You Can Too

A photo to accompany a story about investing with the Child Tax Credit Courtesy of Mahlet Amaha
Mahlet Amaha with her son. An investing coach and the creator of Black Womxn Are Wealthy, Amaha is using her Child Tax Credit to build an investment portfolio for her son that will be worth $8.8 million by the time he is 65.
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My toddler will have $8.8 million invested by the time he is 65.

Yes, you read that correctly. I started investing for my son’s retirement when he was a newborn, and after his investment portfolio compounds with time, he will be a multimillionaire. 

And there is another facet to our story: all of my contributions will come from the child tax credit that is given to a majority of parents in the U.S., which means you can likely create the same plan for your child.

I understand our situation seems like an anomaly. According to a 2019 study, 37% of adults in the U.S. have less than $5,000 saved for retirement—or no retirement savings at all. With so few people actively engaged in investing for their own retirement, the idea of investing for their children’s retirement might seem overwhelming.

But I learned early on from my immigrant father that it was important to try and plan out my life as much as I possibly could. He was an avid saver, and if the barriers to investing in the stock market hadn’t been so high for him, I’m convinced he would have succeeded as a long-term investor as well.

Mahlet Amaha with her husband and son. Courtesy of Mahlet Amaha

Through my work as an investing coach, I know that saving can only take you so far. The key lies in investing. I educate my Black Womxn Are Wealthy Instagram community, as well as my individual clients, on one very specific point: After you build up your emergency fund and pay all of your known expenses, the rest of your money should be working for you in the stock market.

I want to take that idea of investing even further by bringing our children into the mix. I’m on a mission to make this a more common practice, especially in communities of color. I believe that we can all create generational wealth and set up our children to enjoy the security and stability that comes with building wealth. And we can do all this without spending a dime of our own money.

My plan takes a bit of strategy and education, but is accessible to everyone who wants to learn. To get started, you need to understand how small sums can be transformed into huge gains.

Compound Growth Is Magic

Considered the eighth wonder of the personal finance world, compound growth can simply be described as money making money. When your money is invested in the stock market, its earnings produce their own earnings. The effects of this compound growth can help turn a series of relatively small contributions into an unbelievable number. 

Pro Tip

For compound interest to truly work its magic, you need lots of time. That’s why even a small investment, early on, can grow into a large nest egg decades down the road. 

For example, I plan on investing $2,000 a year for my child until he turns 18. My total contribution will equal $36,000. That’s it. 

But through the power of compound growth, this $36,000 contribution will turn into $8.8 million dollars by the time my son is 65 years old.

As you can see, patience plays a role in this plan. You need time to allow compound growth to show its effect. Think of time and compound growth like butter and toast. Individually, they are O.K., but if they team up together to grow your money? *Chef’s kiss.*

Because my child is very young and very far away from retiring—he’ll hit the traditional retirement age over 60 years from now—we still have a lot of time to invest the money we are contributing.

This means we can contribute a small amount, sit back, and let the stock market do the heavy lifting.

The Effect of Time and Compound Growth

Now let’s put this example in a real-life context. 

Let’s say four people of different ages decide to invest $1,000 and keep it invested until they hit their 65th birthdays. They each buy an index fund that tracks the total stock market. These four people are ages 45, 35, 15, and 0 (a.k.a., a newborn).

Because the stock market has grown 10% per year on average for the past 70 years, let’s predict that each of their investments over the long term will do the same. 

Here are the results after each individual hits the traditional retirement age of 65.

The 45-year-old was able to invest for 20 years, and their $1,000 grew to $6,728.

The 35-year-old was able to invest for 30 years, and their $1,000 grew to $17,449.

The 15-year-old was able to invest for 50 years, and their $1,000 climbed to $117,391 while invested.

But the 0-year-old, who was able to invest for 65 years, grew their $1,000 to an astonishing $490,371!

This is the advantage of investing early in life. The amount of time invested gives compound growth the ability to work hard and make even a small amount of money transform in a significant way. You can run your own scenarios using this compound growth calculator.

How to Give Your Child a Multimillion-Dollar Retirement — for Free 

Now it’s clear that the earlier you invest, the better the outcome. You might be wondering what steps you can take to start investing for the children in your life — and how it’s possible to invest on your children’s behalf for free.

When I had my baby in 2019, I received another welcome surprise: qualifying for the Child Tax Credit.

If you earn under $200,000 as a single filer or $400,000 married filing jointly, you qualify to receive $2,000 for every child dependent that lives with you. 

(One major current change: The American Rescue Plan stimulus package expanded the Child Tax Credit for the tax year 2021. Families that earn under $75,000 as a single filer or $150,000 married filing jointly will receive a total $3,600 for children under the age of 6 and $3,000 for children between the ages of 6 and 17. This is a temporary expansion created by the stimulus package, but it does mean more money to invest if you are eligible this year.)

Because I was very interested in creating generational wealth for my new baby, I took the $2,000 I received for the child tax credit and invested it in a brokerage account in my name with him as the beneficiary. Within that same account, I bought a low cost index fund that tracks the CRSP total market index.

I plan to contribute the child tax credit amount every year until he turns 18. When he turns 18, I will have contributed $36,000 in an investing portfolio that is designated for him. However, based on an annual compound growth of 10% per year and dividends being reinvested into the account, the portfolio will grow to $100,094.

Now for the most important next step in my plan: Doing nothing. No more contributing. No touching. I will keep the money invested. 

When my child is 45 years old, the portfolio will have grown to $1.3 million dollars.

By the time he is 65 years old, my son’s portfolio will have $8.8 million dollars — all from a $36,000 contribution from the government.

I plan on gifting him or leaving him with the shares of this investment portfolio in my estate plan. And due to the lifetime exclusion tax act, I can leave him the shares of this investment entirely free from gift or estate taxes. 

An extra benefit of him receiving this as part of an estate is that the assets will get a “step up” in basis, which will minimize the amount of capital gains tax he will have to pay when he starts living off of his investments.

Thanks to this simple way of investing in the stock market, I am able to create generational wealth for my child. And I believe that with some education and strategies put into place, many of us — maybe even all of us — can also start building and creating generational wealth for our children, and invest in our futures for the long term.