I just got a Bottom Line Magazine offer in the mail, and thought I needed to blog about this one of the “smart money tip” inside.

The tip is titled “Make Your Grandchild a TAX-FREE Millionaire!” and they include this nice chart showing a lump sum investment growing skyward to $2 million.

How it works.

The basis of this tip is the Roth IRA, which allows the gains to be taken out tax free after a certain age. Here’s how it goes…

Once your teenage grand child is gainfully employed, they contribute $4,000 between the years of 16 and 21 and that’s it. The investments in the Roth IRA earn 10% a year (average over 49 or so years) and, voila at the age of 65 they grandchild has over $2 million tax-free.

Why it’s bunk.

First, let me say that the theory is sound and would work. The problem is that over the 49 years that the money is accumulating, inflation will be eroding the value of the dollar.

Assuming 3% inflation (average) and 10% return over 49 years, I entered these values into the inflation calculator at Forbes and that $2,000,000 will be worth approximately $449,619 in 49 years.

Don’t get me wrong, I’m not saying $449,619 is chump change, but it’s a far cry from $2,000,000!

As I said, the theory is sound and it’s not a bad idea, but don’t think you’re setting your grandchild up to be the next Gates or Rockefeller.

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