Roth IRAs for Kids
This article is for Sida, one of QVC's viewers
in California who wanted to know about Roth IRAs for kids.
1998, a new kind of IRA, called a Roth, came on the scene, and at the time my
advice to everybody was: If you qualify, get one. It still is. The Roth is an
especially wonderful way for those of you who have kids and who want to save for
college to do so, but you can also save for a home of your own or for retirement
down the road. Let me explain.
A Roth is different from a traditional
IRA. How? If you want a detailed explanation please see the ASK SUZE book on
Planning for your Future, pages 22-35. But for those of you who I know won't go
to the book to look it up, this is how they work.
The money you
contribute to a Roth (up to a maximum of $2,000 a year per person if you meet
certain income qualifications) isn't tax deferred. Up front, your contributions
are treated just like the money you are putting into any of your non-retirement
investment accounts; in other words, you must pay income taxes on the money
before investing it. (With a traditional IRA, the money you contribute isn't
taxed until you withdraw it at retirement.) So what's the big advantage? There
are lots of advantages to a Roth, but the biggest one is that you can withdraw
both your money and earnings tax free. If you are 59.5 or older and those funds
have been in the Roth for at least five years. With a regular IRA, you pay taxes
on your earnings as well as contributions when you start taking your money out.
Second, you don't have to wait until you're 59.5 to withdraw any of your
original contributions to a Roth account; you can take out your own money any
time you want, for any purpose, without paying taxes or a penalty, because it's
already been taxed. It is only the earnings on that money that have to stay in
the account for five years and until you are at least 59.5 years of age.
Third, your money, both your contributions and your earnings, can be
withdrawn without any penalty regardless of how old you are or how long those
funds have been in there IF the money is used for certain specific purposes.
These include paying for college or graduate school and using up to $10,000 to
buy your first home.
Even though the Roth is a great deal for anyone who
qualifies as a way to save for retirement, the main reason for this article is
for those of you who have kids or grandkids. If they are old enough to work,
even just around the house or at your office, the Roth IRA is especially
attractive, because kids' tax bracket is usually very low or nonexistent. The
reason I said "if the kids are old enough to work" is that all money that is put
into a ROTH IRA must come from kids' own earned income. It can't be money that
is a gift or is earned from dividends or interest or from any other investment.
If your child is old enough to earn some money by doing odd jobs, then that can
go into this Roth.
Let me show you why you are going to wish your
parents could have helped you do this, and why you should help your kids or
grandkids to do it. Let's say your child does some paid chores after school and
that she earns $166 a month. If she starts working at age 8 and every month puts
her $166 into a Roth IRA that invests in a good no load mutual fund with an
average 11-percent rate of return, at the age of 17 she would have a total of
about $30,000 in that Roth. (For more about no-load funds, see the ASK SUZE book
on Mutual Funds and Annuities, page 39). Of that $30,000, $18,000 can be taken
out take tax- and penalty-free for any purpose, because that's the amount she
contributed over the years. The additional $12,000 is considered earnings; but
if the child uses that money for education, she can also withdraw the $12,000
penalty-free, without waiting until she reached the mandated age of 59.5. She
will have to pay taxes on that $12,000. But she could use just the $18,000, and
leave the $12,000 in there to grow until retirement.
In fact, by the
time that child is 60, $12,000 at 11 percent a year will have grown into
$1,000,000. Not so bad, if you ask me. And if she left all $30,000 in the
account to grow and never added another penny, at age 60 she would have about
$2.7 million dollars, and she could take it out totally tax free. How happy
would any of us be to know that, at age 60, we'll have close to 3 million
dollars, tax free, waiting for us? I thought so.
In my opinion, this is
something that you can't let your kids pass up. For that matter, if you qualify,
you should also open up a Roth.
Where can you open up a Roth IRA in your
kids names? There aren't a lot of options, because some mutual fund companies
and brokerage firms won't open an account for minors. But other fund and
brokerage companies are willing to work around this by having a parent or
guardian co-sign the paperwork. Here's a list of large fund companies that are
willing to open IRAs for kids:
* Baron, 800-992-2766
* Dodge &
* Invesco, 800-525-8085
* Janus, 800-525-8983
Neuberger & Berman, 800-877-9700
* PBHG, 800-433-0051
* T. Rowe Price
(on a case-by-case basis), 800-638-5660)
* Strong, 800-368-1030
* USAA, 800-531-8722
Please note that mutual funds usually require a minimum
investment: $250 at Strong, for example, and $1,000 at T. Rowe Price. But if you
want to start smaller, brokerage firms Charles Schwab and TD Waterhouse will
open IRAs for kids with no minimum investment and no annual maintenance fee.
So the bottom line is this: The Roth IRA is a here for you to use. For
now. Who knows if it will be around in the years to come, after a new President
and Congress take office? That I am not sure about, but if you can, it's
something that you and your kids should be taking advantage of.
For a great comparison of the advantages and restrictions of Roths
and other kinds of IRAs, please go to Smart Money