IRA for kids?


J

John

Hi

Is it possible to open an IRA in my sons name that he can have when he
retires. I am sure if I put $2000 into one know, he will have plenty
when he is 65. He is 9 now.

Thanks
John
 
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B

Brent D. Gardner, ChFC

John said:
Hi

Is it possible to open an IRA in my sons name that he can have when he
retires. I am sure if I put $2000 into one know, he will have plenty
when he is 65. He is 9 now.
You can, if the son has "earned income" -- because that's all one can use to
fund an IRA.

I would discourage it. Why? If you want your son to go to college, then
there are things you can do to maximize his eligibility for financial aid.
One is keeping money out of his name. Assets in your son's name count
roughly SEVEN times more against him when he applies for financial aid, as
the same asset in your name.

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.
 
C

cal-lester

John said:
Hi

Is it possible to open an IRA in my sons name that he can have when he
retires. I am sure if I put $2000 into one know, he will have plenty
when he is 65. He is 9 now.

Thanks
John

NO & YES

No, you can NOT open an IRA for a KID.

Yes you can open an IRA for YOUR Son, providing that he has at least that amount of TAXABLE
Income.ie: $1,000 of Taxable Interest (or baby sitting fees), $1,000 IRA contribution

Cal Lester CLU
 
G

Gene E. Utterback, EA

John said:
Hi

Is it possible to open an IRA in my sons name that he can have when he
retires. I am sure if I put $2000 into one know, he will have plenty
when he is 65. He is 9 now.

Thanks
John
In order to open an IRA the participant must have earned income. Roughly,
this equates to money they earned that they paid Social Security and
Medicare tax on. Seeing as your son is 9, I think you would be hard pressed
to find a way to get him employed without breaking some child labor laws :)

If you are considering helping him prepare for retirement, there is another
option that you may want to consider - a combined, fixed/variable annuity -
though there is a small catch. Most annuities require a bit more than $2K
when the money is nonqualified (non retirement oriented).

Assuming a 7% return (after costs), $5K invested now for a 9-year old could
produce as much as $181K or $8,500 a year for the rest of his life once he
hits age 59.5. And if the market returns just over 11% - on average - it
could be worth closer to $1.5 MILLION. Frankly, I think that's a pretty
good legacy to leave a child.

You do have to be aware that most colleges expect the students to pony up a
large percentage of their income to help with costs. However, many schools
don't look at money in retirement or annuity accounts. Of course, seeing as
your child has 9 years before he is ready for college there is no way of
accurately predicting what he will need or what the schools will expect,
costs are rising for education more rapidly than just about any other sector
of our economy.

Good luck,
Gene E. Utterback, EA
 
G

gindie

IRA's can only be funded with earned income. So, if your son makes
money mowing lawns, shoveling driveways, working for your business,
etc. he would be able to fund an IRA to the lesser of: the amount he
earns or $3000.

Also, realize not all fund companies open accounts for minors. You
might have to look around for one.
 
J

John

My son has about $2000 in his savings account, any recommendations of
the best place to put it for long term. I would like to make it work
for him so that he can have a great retirement. $2000 at 15%
compounded would be over $5 mill by the time he retires...
 
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P

PaulMaf

From: "Gene E. Utterback, EA" (e-mail address removed)
Date: 1/15/04 1:51 PM Pacific Standard Time
Message-id: <bu71hn$eiak7$1@ID-215792.news.uni-berlin.de>
In order to open an IRA the participant must have earned income. Roughly,
this equates to money they earned that they paid Social Security and
Medicare tax on.
Although it is true that the income must be earned, there is no requirement
that any SS or medicare taxes be paid on it.

After all it is entirely possible for a kid to earn income without being
subject to either. Baby sitting, news paper delivery boy, grass cutting, etc.


Seeing as your son is 9, I think you would be hard pressed
 
B

Brent D. Gardner, ChFC

Gene E. Utterback said:
In order to open an IRA the participant must have earned income. Roughly,
this equates to money they earned that they paid Social Security and
Medicare tax on. Seeing as your son is 9, I think you would be hard pressed
to find a way to get him employed without breaking some child labor laws
:)

Paul is right, some kids start working early in life. I started delivering
newspapers at 11.

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.
 
N

NW

My son is 18 and I have him convinced that opening an IRA is a good idea.
But, finding a good mutual fund with a low minimum initial investment,
preferably around $300, is proving to be a challenge. So far the only
prospect I've identified is a Roth IRA offered by H & R Block. Anyone have
any other suggestions?
 
S

Sgt. Sausage

My son has about $2000 in his savings account, any recommendations of
the best place to put it for long term. I would like to make it work
for him so that he can have a great retirement. $2000 at 15%
compounded would be over $5 mill by the time he retires...

First, you're being totally unrealistic. 15% average for, what (?)
50 years. Not gonna happen. Maybe if you're lucky, very lucky
11, possibly 11.5%.


That's your first mistake. It's amazing what a difference a few
percentage point will make.

Second mistake: Inflation. Where, in your calculation do you
account for inflation?


Here's some history:
This may not be the best reference, but it's the first one I
found:

http://winke.com/hfpc/hfpc./hisret.htm

Note the *long-term* returns of the various indexes.
Nowhere near 15%.

Note the last entry in the table labelled "U.S. Consumer
Price Index" -- roughly speaking, this is the "inflation
factor".

For instance, if you invested in an S&P Index for the
last 40 years, you'd have averaged 12.12% return -- BUT,
that 12% you just earned this year is eaten away by the
4.46% erosion of inflation. You end up with a long-term
net return averaging about 7.6%.

Nowhere near your unrealistic 15%.
You're more than likely going to end up with half you're
projected 15%, by the time you take into consideration
both inflation itself, and your inflated expectations on a
sustainable return. Let's call it half and say, long term,
factoring inflation, you can assume roughly an 8% return.
Here's what I get:

age balance interest
9 $ 2,000.00 $ 160.00
10 $ 2,160.00 $ 172.80
11 $ 2,332.80 $ 186.62
12 $ 2,519.42 $ 201.55
13 $ 2,720.98 $ 217.68
14 $ 2,938.66 $ 235.09
15 $ 3,173.75 $ 253.90
16 $ 3,427.65 $ 274.21
17 $ 3,701.86 $ 296.15
18 $ 3,998.01 $ 319.84
19 $ 4,317.85 $ 345.43
20 $ 4,663.28 $ 373.06
21 $ 5,036.34 $ 402.91
22 $ 5,439.25 $ 435.14
23 $ 5,874.39 $ 469.95
24 $ 6,344.34 $ 507.55
25 $ 6,851.89 $ 548.15
26 $ 7,400.04 $ 592.00
27 $ 7,992.04 $ 639.36
28 $ 8,631.40 $ 690.51
29 $ 9,321.91 $ 745.75
30 $ 10,067.67 $ 805.41
31 $ 10,873.08 $ 869.85
32 $ 11,742.93 $ 939.43
33 $ 12,682.36 $ 1,014.59
34 $ 13,696.95 $ 1,095.76
35 $ 14,792.71 $ 1,183.42
36 $ 15,976.12 $ 1,278.09
37 $ 17,254.21 $ 1,380.34
38 $ 18,634.55 $ 1,490.76
39 $ 20,125.31 $ 1,610.03
40 $ 21,735.34 $ 1,738.83
41 $ 23,474.17 $ 1,877.93
42 $ 25,352.10 $ 2,028.17
43 $ 27,380.27 $ 2,190.42
44 $ 29,570.69 $ 2,365.66
45 $ 31,936.34 $ 2,554.91
46 $ 34,491.25 $ 2,759.30
47 $ 37,250.55 $ 2,980.04
48 $ 40,230.60 $ 3,218.45
49 $ 43,449.04 $ 3,475.92
50 $ 46,924.97 $ 3,754.00
51 $ 50,678.96 $ 4,054.32
52 $ 54,733.28 $ 4,378.66
53 $ 59,111.94 $ 4,728.96
54 $ 63,840.90 $ 5,107.27
55 $ 68,948.17 $ 5,515.85
56 $ 74,464.02 $ 5,957.12
57 $ 80,421.15 $ 6,433.69
58 $ 86,854.84 $ 6,948.39
59 $ 93,803.23 $ 7,504.26
60 $ 101,307.48 $ 8,104.60
61 $ 109,412.08 $ 8,752.97
62 $ 118,165.05 $ 9,453.20
63 $ 127,618.25 $ 10,209.46
64 $ 137,827.71 $ 11,026.22
65 $ 148,853.93 $ 11,908.31
66 $ 160,762.24 $ 12,860.98
67 $ 173,623.22 $ 13,889.86


So, by the time the kid's 67, s/he's got a bit under
175K in today's dollars (we've already adjusted
for inflation.)

Now, that's quite a tidy sum -- especially for not
doing a darned thing but let it sit for a few decades,
but it's hardly enough to retire on. It's not even
close to your goal of a "great retirement" for
your kid. It's a good start though.

I don't mean to bust your bubble, but people get
almost high/drunk when they start these types of
calculations and don't realize that they're projecting
based upon totally unrealistic assumptions. The following
assumptions, in my opinion, are gonna squash your
dream of 5 million dollars.:

(a) 15% return over the life of the investment.
Not gonna happen -- see above historical
rates.

(b) No inflation. Really, you don't take this into account
anywhere. This is a killer.

(c) No costs for managing the money. Investing *costs*.
You're planning on being in it for the long-haul, and there's
no single investment I can think of that you would buy and
hold for 60(ish) years. You're going to have to move the
money around at some point, and however much/little the
transaction costs are, they're only going to subtract from
the final result.

(d) Taxes -- you make no allowance for taxes. Whether the
investment is (or is not) tax advantaged/deferred/sheltered,
at some point, you've got to pay Uncle Sam what's due.
If you succeed in setting up an IRA, then those will be
deferred until withdrawal time. I have doubts about
being able to do this for a 9 year old, but there's no
reason you can't invest outside an IRA untils s/he gets
old enough to have real "earned" income and be
eligible for an IRA.

The point is, taxes will take an additional bite out of it.

Now, If you can get just a small amount in addition to
the initial 2000 added every year, your kid's situation looks
far better. As little as $100 a month, which your kid should
start investing with the first paycheck from the first job, will
bring the goal of a "great retirement" much closer -- especially
if there's an employer match on that $100 a month, making
the effective contribution $200 a month. Now we're looking
at:
Age Balance Interest Contribution

9 $ 2,000.00 $ 160.00 0
10 $ 2,160.00 $ 172.80 0
11 $ 2,332.80 $ 186.62 0
12 $ 2,519.42 $ 201.55 0
13 $ 2,720.98 $ 217.68 0
14 $ 2,938.66 $ 235.09 0
15 $ 3,173.75 $ 253.90 0
16 $ 3,427.65 $ 274.21 0
17 $ 3,701.86 $ 296.15 0
18 $ 3,998.01 $ 319.84 0
19 $ 4,317.85 $ 345.43 0
20 $ 4,663.28 $ 373.06 0
21 $ 5,036.34 $ 402.91 0
22 $ 5,439.25 $ 435.14 2400
23 $ 8,274.39 $ 661.95 2400
24 $ 11,336.34 $ 906.91 2400
25 $ 14,643.25 $ 1,171.46 2400
26 $ 18,214.70 $ 1,457.18 2400
27 $ 22,071.88 $ 1,765.75 2400
28 $ 26,237.63 $ 2,099.01 2400
29 $ 30,736.64 $ 2,458.93 2400
30 $ 35,595.57 $ 2,847.65 2400
31 $ 40,843.22 $ 3,267.46 2400
32 $ 46,510.68 $ 3,720.85 2400
33 $ 52,631.53 $ 4,210.52 2400
34 $ 59,242.05 $ 4,739.36 2400
35 $ 66,381.42 $ 5,310.51 2400
36 $ 74,091.93 $ 5,927.35 2400
37 $ 82,419.29 $ 6,593.54 2400
38 $ 91,412.83 $ 7,313.03 2400
39 $ 101,125.86 $ 8,090.07 2400
40 $ 111,615.92 $ 8,929.27 2400
41 $ 122,945.20 $ 9,835.62 2400
42 $ 135,180.81 $ 10,814.47 2400
43 $ 148,395.28 $ 11,871.62 2400
44 $ 162,666.90 $ 13,013.35 2400
45 $ 178,080.25 $ 14,246.42 2400
46 $ 194,726.67 $ 15,578.13 2400
47 $ 212,704.81 $ 17,016.38 2400
48 $ 232,121.19 $ 18,569.70 2400
49 $ 253,090.89 $ 20,247.27 2400
50 $ 275,738.16 $ 22,059.05 2400
51 $ 300,197.21 $ 24,015.78 2400
52 $ 326,612.99 $ 26,129.04 2400
53 $ 355,142.03 $ 28,411.36 2400
54 $ 385,953.39 $ 30,876.27 2400
55 $ 419,229.66 $ 33,538.37 2400
56 $ 455,168.03 $ 36,413.44 2400
57 $ 493,981.48 $ 39,518.52 2400
58 $ 535,899.99 $ 42,872.00 2400
59 $ 581,171.99 $ 46,493.76 2400
60 $ 630,065.75 $ 50,405.26 2400
61 $ 682,871.01 $ 54,629.68 2400
62 $ 739,900.69 $ 59,192.06 2400
63 $ 801,492.75 $ 64,119.42 2400
64 $ 868,012.17 $ 69,440.97 2400
65 $ 939,853.14 $ 75,188.25 2400
66 $ 1,017,441.39 $ 81,395.31 2400
67 $ 1,101,236.70 $ 88,098.94 2400


NOTE: I'm assuming you're gifting the initial 2K, and
there will be no contributions until age 22 -- roughly
when most kids graduate, get their degree, and get
their first job.

Now, we're starting to get into some money. It's not
RealMoney yet -- the kid won't be Bill Gates (at what
is he worth these days? 50 *billion* ?) -- but this is
certainly do-able from a retirement perspective.

Please don't expect that you'll have 5 milion dollars.
It's not going to happen.
 
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B

Brent D. Gardner, ChFC

NW said:
My son is 18 and I have him convinced that opening an IRA is a good idea.
But, finding a good mutual fund with a low minimum initial investment,
preferably around $300, is proving to be a challenge. So far the only
prospect I've identified is a Roth IRA offered by H & R Block. Anyone have
any other suggestions?
American Funds will let you open up one with $250, or $50 per month.

Brent D. Gardner, ChFC
Chartered Financial Consultant
http://members.cox.net/brentdgardner1378/

"Be ever questioning. Ignorance is not bliss. It is oblivion. You don't go
to heaven if you die dumb. Become better informed. Learn from other's
mistakes. You could not live long enough to make them all yourself." - Hyman
George Rickover (1900-86), Admiral, US Navy, advocated development of
nuclear subs & ships

The Chartered Life Underwriter (CLU) and Chartered Financial Consultant
(ChFC), designations owned and exclusively offered by The American College,
signify the highest standards of academic study and professional excellence
in the financial services industry.
 
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