Setting Up A Retirement Account for a Child?

You can't contribute to an IRA/Roth IRA unless you had "wages" in that tax year, so that puts them out of the picture.

I'd recomend putting the money in either an IRA in your name, with him/her as a beneficiary, or putting the money in a tax exempt municipal bond fund from your state. Usually earns 5% to 6% and as your child gets older he can move the money tax free into a account with better earnings potential.

 

fwiw, my philosophy is to make sure they can get through school (529s, etc.). after that it's their damn problem to figure out retirement.

if they're lucky i'll kick off with some good money having gone unspent on cars (in that case, shame on me!) and they can do what they please then.

it's nice to have money, but i always fret that it'll make the monsters soft. worrying about how to fund your retirement and how to afford your first house and all that jazz most folks do in their 20s is a really wildly educational process, imo. and it can teach you about a LOT more things than simply retirement and mortgages.

ymmv, obviously.

doody.

 

An interesting take that some may say makes them soft is to get together enough for a deposit for their first house. So, at age 20ish they get lumbered with a mortgage commitment, have to get in flatmates etc. and though they would rather live large and rent they get their first property under their belt freehold by about age 25-28. In spite of 10 years of *****ing about it, eventually they thank their parents. Had two friends parents do it to them and it did them (the friends) a lot of good.

James

 

My wife and I practice annual "gifting" religiously. Each of us gives each of our two kids $11,000 per year (once in awhile a grandparent will kick in some more as well). The gift tax exclusion was recently raised from $10,000 to $11,000. That comes out to $22,000 per year per child and
adds up pretty quickly. If invested properly for twenty five years or so (both have S+P 500 Index funds and my personal favorite stock Altria group (formerly Philip Morris) which is up almost 90% the past year along with a nice re-invested dividend) the sky is the limit. I agree with one poster, though I wouldn't tell them about it until much later so they arent hawking me for it. LOL

 

NY Joe is correct. You must have earned income to qualify for any retirement account. That said, if your child has modeling income, this will work (hint).

If you get over the income hump, definitely go for a Roth IRA.

From here you may wish to consider an educational IRA and/or what we call Sec. 529 plans. I'm with Doody on this one. All you owe your kids is the chance to climb up as high as possible on the diving board of life as they make their first swan dive out the door. From there, they are on their own.

However, don't neglect investing in their education right from the git go. Both my kids have gone to private schools their entire lives. Trust me on this one, paying $10k a year tutition hurt. However, so far, it has paid off handsomely. Don't fall for this bs that kids in private school don't learn street smarts. The public schools are so out of control that it is almost criminal. Case in point. Many public school teachers sent their kids to private schools.

Also the greatest gift that you can give you kids is your time. This quality time stuff is also bs. The only thing that counts is quantity. Teach them well and you will be amazed at what you'll learn.

Finally, there is the uniform gift to minors act where you just set up a custodial account and you and your wife can give up to $22K a year. This also makes a great sandbox for grandparents. However, put the money in growth stocks. When my daughter was born in 1983, she got 500 shares of Exxon. Because Exxon has split three times since then, that 500 shares has now grown to 4,000 shares. I'm not saying that you should invest in Exxon. A solid mutual fund is probably a better bet. But definitely stocks over money funds for a kid.

But what about UGTMA accounts when the minor becomes a major? Well, one of the truths in life that you will learn is that parents lie to thier kids. In this case, don't tell the kiddos anything about the UGTMA accounts. If they do find out about it, just lie and them that it is in a trust that they can't touch.

Welcome to my world and good luck, DrTax

 

be careful how you set it up as I know folks who put it in the childs name and come 18/21, he took it all and blew it surfing in california. While we all think our kids will never do that you never know. Certainly put some in their names as you can have them earn income without tax up to certain levels before your rate kicks in but I like to just hold most of it in accounts under my name to be safe.

 

Actually, my daughter's retirement plan is spelled "Dartmouth."

Finally, if you are concerned about having too much money in an UGTMA account, the next step is a family limited partnership. But that's for another day and another lesson.

DrTax

ps I'd max out the contributions to the 529 plan so long as it has a good exit plan. Trying to fine tune something 18 years out is like peeing into the wind, you just get wet. I believe that the IRS will let you drop $60k into a 529 plan without triggering the gift tax rules, but be sure to read and follow all label directions before trying this at home.

 

4sfed4, I'm jaming right now trying to get caught up as I head out the door to go to the Detriot car show tomorrow. (Let's see, it's 70 degrees in Texas, and I'm leaving to go to Detroit... Not sure I should be giving any advice to anybody even if it is free..) So I will not have time to check your math.

My point is that you are wise to maximize everything that you can right now. One investing rule that everyone should understand is the "Rule of 72." Simply put, money invested at 7.2% doubles every 10 years. Likewise, money invested at 10% doubles every 7.2 years.

Going back to the 500 shares of Exxon I brought for my daughter when she was born. Exxon has a rep for doubling in value every 7 to 10 years and then splitting. This how 500 shares became 4000 shares in almost 21 years.

Now buying those 500 shares definitely put a hurt on the old pocketbook 20 years ago. But once purchased, we just put it on the shelf and forgot about it.

Same thing with a college fund. Don't over analyze the situation. The most important thing is to just do it and invest the money wisely. A 529 plan is great cause the money grows tax free. But any kind of plan is better than none. Putting in only $100 is better than none.

Right now, time is on your side. 18 years from now, time will be your enemy.

DrTax

ps Pls note that I'm not a professional money manager, and I'm certaintly not recommending that you buy Exxon stock. You need to do your own homework and invest wisely. Many people compare Wall Street to Las Vegas. This is valid comparison if you are into Google IPOs. But if you are buying seed corn, it is hard to go wrong with solid blue chips like Wally World, Microsoft, Exxon, IBM and so forth and so on. In other words, those companies who are making money today are the best guess as to those who will be making money in the future. You don't need to hit it out of the park. Averaging 10% a year does just fine thank you very much.