Paul Heinz

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Yes you can: Open an IRA for your Child

Money seems to be a preoccupation of mine these days, which is ridiculous, as there are more important things to consume one’s time, like albums, ping-pong and baseball.  But one aspect of money management I’ve embraced recently is one that every parent should at least consider: opening Roth IRAs for your children. 

Back in college, when my friend Mark announced that he’d just opened an IRA, not only did I not know what an IRA was, but once explained to me, I didn’t understand what the hurry was.  After all, I was still visiting the TYME machine (ATM to those of you from outside Wisconsin) three times a night to buy “just one more” pitcher of Hamm’s; the only foresight I possessed was drinking a glass of water to minimize the inevitable hangover the following morning.

Over time, I learned about saving early and saving often, and by now my family has reaped the benefits of this strategy, but I could no doubt be in a better position had I started saving prior to obtaining a full-time job after college graduation.  As a father of three, I’ve looked for ways to get my kids on the right track earlier than I did, particularly since debt accumulation is higher than ever and wages for many careers are stagnant.  Saving money might be more important for those currently in their teens and 20s than it ever was for those currently in their 40s and 50s.

Enter the custodial Roth IRA.  Yes, your kids can open an IRA (or, more accurately, you can open one for them if they’re under age 18).  Any money your kids earn up to $5500 this year can be put into an IRA.  That doesn’t mean your child can’t spend or save the money she’s earned this year; my two daughters earned small amounts in 2013, and they were allowed to spend or save that money as they saw fit, but I matched their amounts and put it into their respective IRA accounts.  Some companies don’t allow you to open up a custodial IRA – Fidelity is one example – and some brokerage firms require minimums that my 16 year-olds couldn’t reach, but there are several options to fit most people’s needs.  I ended up opening accounts through E*Trade, though I could just as easily have opened accounts at TRowe Price, Vanguard, Charles Schwab or TD Ameritrade. 

The idea of course is twofold: get your kids to become accustomed to saving (even if they’re currently not flipping the bill, they’re learning that saving for one’s retirement is important), and start growing their money.  My daughters only earned $900 and $1500, respectively, in 2013.  But if they manage to earn 7% for the next 50 years, that money will grow to $26,511 and $44,186.  Not a bad start.

If you can’t afford to match your children’s income in total, perhaps come up with a compromise and have your kids save a portion of their savings and you match that portion.  Even a couple of hundred dollars is better than nothing, and there are funds that will allow you to open an IRA for as little as $100.

One note: you can only invest legitimate earnings, so keep good records of your child’s income and file a tax return even if they don’t have any withholdings to recoup.  One of my daughters earned all of her income by babysitting and doing other odd jobs that didn’t require a W2 or generate a 1099, but I still had her fill out a tax return (form 1040EZ only took her 5 minutes to complete).  Throughout the year, I kept track of all of her earnings on an Excel spreadsheet and included it with my tax records.

There are great resources to get you up to speed on opening Roth IRAs for your children.  Three than I perused before taking the plunge are below:

http://www.forbes.com/sites/baldwin/2011/04/18/make-your-kid-rich-with-a-roth-ira/

http://www.investopedia.com/articles/personal-finance/110713/benefits-starting-ira-your-child.asp

http://www.kiplinger.com/article/saving/T046-C001-S001-give-the-gift-of-a-roth-ira.html

Now start keeping track of your children's savings, open up an IRA, select an index mutual fund, and watch it grow.

Copyright, 2017, Paul Heinz, All Right Reserved