Last year marked the official entry of my eldest son into the ranks of income earners. He started a little entrepreneurial venture and made a whopping $32.
That was great on its own, but it also kicked open the door to a Roth IRA. For you non-Americans (or less savvy Americans), the Roth IRA is a retirement account funded by after-tax dollars, and any investment earnings (if you follow the rules) are tax-free. Your money grows and grows and grows, and when you’re finally ready to spend it, the government (again, assuming you follow the rules) gets nothing. It’s like some fantasy dreamt up by Ayn Rand, but it’s real.
While a Roth IRA is exciting for anyone (and by “anyone”, I mean wealthy folks worried about taxes), it’s particularly exciting for someone young. With an extremely long time horizon, compound interest can do some absolutely amazing things. And if those amazing things occur in a Roth IRA, they can be completely tax-free.
‘Cause the clock is ticking to make a Roth IRA contribution for 2018, I’m going to cut to the chase. If your kid (or grandkid, or niece, or whatever) has earned income last year and no one has opened and funded a Roth IRA for him / her, you may want to do so before close of business Monday April 15.
You can find out more information about opening a Roth IRA for a kid here.
The kid’ll need income, as defined by the IRS. Some adult will need to be custodian of the account, but that will end when the kid reaches the age of majority (which may pose its own risks…).
While the Roth IRA contribution is limited to the amount of income earned (up to the annual IRS limit), the contribution doesn’t have to come from those earnings. So rather than take $32 from my son’s piggy bank, we made the contribution a gift to him. We’ll keep this up as long as possible, so as his earnings increase he may be looking at a nice little Roth IRA pile rather early in life. If his 8 y.o. brother ever gets off his butt and gets a job, we’ll do the same for him.
While I imagine many a brokerage accommodates Roth IRA’s for kids, a quick search showed Fidelity and Schwab appear to be really targeting this audience. Both sites provide good information on Custodial Roth IRA’s and their own offer & requirements (and neither is giving me anything for mentioning them).
Since I already have Fidelity accounts, I opened my son’s Roth IRA there. It was ridiculously easy. There was no account minimum, and on certain Fidelity index mutual funds, there was no investment minimum or management fee. My son helped me pick a mutual fund, and he was excited when he realized this was real money, not some fantasy stock picking contest. It did feel a little weird putting in an order for $32, but the little acorn becomes the mighty oak!
Opening a tax-advantaged account at a very young age is wonderful, but the real value will hopefully come from the lessons it can provide. If we can use it to teach him about investing, stock markets, compound interest, and the like (plus maybe tax avoidance…), this little Roth IRA will provide returns far beyond just its monetary value. It’s only the very first step in making him a disciplined and educated investor, but it’s a great first step!
Have you opened a Custodial Roth IRA? What are you waiting for? Your kid may be one lemonade stand away from a compound interest juggernaut!
2 thoughts on “My Son, Future Bazillionaire”
Nice initiative. I’m not aware of such type of account in Europe and, taking into consideration that we are still planning some moving around, I do not think it would worth to tie up with some country for the moment.
What I’m planning in the near future is to have an account on my name and make some deposits on it for them, showing how the investments work on the real world. For the moment I printed some “fake” Mcdonalds stocks and traded with him, distributing dividends every 15 days. I gave him the options to reinvest or to spend it. So far he is more reinvesting than using the money, what is making the father very happy 😉 For next year, if you continue running the contest, I would like to include him on it ;).
All the best.
I am sure there are some options in Europe as well, but as you say it would make sense to pick a long-term domicile for any such account. There are numerous choices for kid-owned assets in the U.S., and they all have pros and cons. This specific account, while it has many advantages, does face the drawback that my son will own it with no conditions when he turns 18. But if I’ve done my job and trained him in personal finance, hopefully he will not draw the funds and head to Las Vegas!
That is great that you are teaching at such a young age – and it is great to see your son already understands the power of compounding 🙂 I do plan on the contest next year, and any of your family members are most welcome (having the kids is a good reminder of the challenges and humility of stock picking).
Thanks for the note – Paul