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Roth IRAs for my daughters

April 29, 2011

On the way back from playing basketball to home. It’s Friday and I’m working from home today. One of the other things I’ve been interested in lately is setting up Roth 401(k), no, Roth IRAs for my daughters. That’s right, my daughters. According to the IRS, there is no minimum age requirement for setting up a Roth IRA. The only requirement is that the individual has earned income. I tried to set up a Roth IRA for my daughter a couple years ago and at that time I tried to set up with share builder. Share builder doesn’t allow Roth IRAs for anyone under the age of 18, so I attempted to falsify the age of my daughters. I just divide it by saying that there really isn’t a minimum age and so they were forcing me to bend the church. In hindsight, that probably wasn’t a very good idea.

However, I can’t remember what started it but I recently got interested in attempting this again. You see, I fully understand the time value of money, and that the most important factor in building wealth is letting your money compound over time. The more time the better. It made sense to me that if I could have my daughters start investing when they were very, very young that the money would have a lot more time to compound and they would have a lot more money when they needed it. Roth Ira’s seeing the perfect tool because of their many advantages: they are a tax deferred investment, you don’t have to pay taxes when you withdraw the money if it’s for a qualified purpose such as the retirement or education, and you can withdraw your contributions at any time without any tax penalties since you are pain into that IRA with after-tax money.

So the key factor in being able to set up a Roth IRA for kids is them having earned income. Tell my daughters are 57 in 10 years old, so it’s not like they have part time jobs after school yet. However they are doing chores around the house and they have a list of five or six chores that they do, and it probably takes them about a half hour each day to complete this list of chores. The way I figure it, if we were to pay a housekeeper to come in and do the same chores we would be paying a minimum of eight dollars per hour and probably much more. Therefore, my daughters have become household cleaners. To make it official so that they have earned income they will be completing tax returns every year. They have also signed a W for and as their employers, my wife and I will be providing them with W-2s at the end of the year. They will earn enough money to have to actually pay taxes, because they will be under the minimum income limit, but by filing a tax return that verifies that they do in fact have earned income, and therefore are qualified to contribute to a Roth IRA.

It took some investigating, but I found a couple of investment brokers that allowed children under the age of 18 to start Roth IRA accounts. I went with E*TRADE. My plan is to set them up on an automatic investment plan with no load no she mutual funds so that they don’t have to pay fees which can get very high for the small amount of money that they are contributing each month. By using a Roth Ira as opposed to a 529 or other college savings plan, it gives us the option to either use the money for their education if needed, or to keep it in the account and use it for their retirement in the event that they either decide not to go to college, which hopefully will not happen, or if they get scholarships , which hopefully will happen.

Someday, my hope is that they will look back and think me and realize what a genius I was! Even if they don’t, I also hope that they’ll learn something about the value of investing their money and how money can grow if you put it into the stock market and let a compound over time. Really, I would like to let them make some of their own investment decisions even after young ages currently. But because of the fees involved with investing in individual stocks, for such a small amount that they’ll be investing it really doesn’t make sense to do anything other than automatic no load mutual funds. Maybe in the future when they built up some money into the account in those mutual funds, we can sell a little bit of it and let them make individual investment decisions. They might really like to put their money into Netflix, Mattel, Disney, alright if other businesses that they are familiar with and will be interested in watching the results.

More details about exactly how to set up your Roth IRA for your kids can be found in an excellent book that I found called the kids Roth IRA handbook securing tax-free wealth from a child’s first paycheck by Tracy foot spelled FOOTE.

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