The Roth IRA movement: Tuesday 27 March

[Nords]

If you read personal-finance blogs on your office computer monitor, then your Tuesday productivity might plummet to new lows.

Personal-finance blogger, CFP, and military veteran Jeff Rose is starting a "Roth IRA Movement" to call attention to the account. Around here that's preaching to the choir, but Jeff has enlisted over 135 other PF bloggers to tout the same theme on Tuesday. He even has a press release (Press Release - Certified Financial Planner Creates Movement to Encourage Roth IRA Savings) and a number of periodicals plan to follow the progress.

The Twitter hashtag for the day is #RothIRAMovement . Bankrate is hosting a Tweetchat that day at 3 PM EST with hashtag #dlrchat .

It started three weeks ago when Jeff was giving a financial seminar to a bunch of college seniors. He asked them who knew what a Roth IRA was. Not a single hand went up.

I'm joining the blogger crowd with a bonus Tuesday post, but I'm not going to try to compete with these rock stars. I think that my niche is establishing a Roth IRA for your kid. I'm starting with a "Kiplinger's Retirement Planning" article faxed to me by Bob Clyatt all the way back in 2005, and adding a couple other articles I collected around then. I'll add some info on child employment from IRS Circular E (Pub 15) and the details on reporting the child's earned income. Then I'll conclude with a short phone survey of the major fund companies, reporting who will (and who will NOT) custody the Roth IRA of a minor. Some surprising results there.

Our daughter started her Roth IRA in 2007 and then quickly learned about bear-market investing. OTOH she made out like a bandit in 2008 & 2009. These days she's still managed to keep up the contributions at college, between her campus tour job and her Kumon part-time job here on Oahu. By the time she graduates to a "real" job (and adds contributions to the military's Thrift Savings Plan) she'll have a solid foundation.

I'm hoping to add 135 backlinks to my blog on Tuesday. Wonder what that'll do to Google's page-rank algorithm, to say nothing of the hit stats...

What lessons learned would you blog about starting a kid's Roth IRA?

 

[kaneohe]

Nords, hopefully one or more of you will be presenting the Roth/TIRA decision process. I've met a few Roth diehards (perhaps hardheads would be another name for them) who were such strong advocates that you could not
reason w/ them.

 

[donheff]

I set one up for DD a few years ago but she doesn't pay a lot of attention to it. I need to point the benefits out to her again.

 

[LOL!]

When my daughter started working in high school, I told her she should start a Roth IRA. To make it easier for her, I told her I would contribute the full amount of her earnings to her Roth IRA, so she could spend what she earned and still look like she invested 100% of her income. My idea was that this would also spur her to get a job in the first place.

A little research showed her that Fidelity would open a Roth IRA for her with essentially no fees and no minimum. There are a number of discount brokerage offices near that job she had, including Fidelity, TDAmeritrade, Scottrade, and Schwab. She was able to walk into the Fidelity office and do everything in person. The first year, she contributed less than $500 and used the money to buy shares in a commission-free ETF online.

It's been a few years now and there have been no fees that I am aware of, but this is her account and she doesn't tell me about it --- except when she wants money to add to it and at the same time asks "What should I buy now?" After that annual one-day flurry of activity, it goes back to the forget-about-it mode.

 

[Animorph]

I did it for DS #1, when I had a little college savings left over, and encouraged him to continue with it. He learned that he actually had to invest it himself, unlike a default or prearranged investment for 401k contributions. It was sitting in cash for a few months until he realized he needed to buy something with it. Not something I thought I had to talk about with him since he did have a few taxable account mutual fund buys under his belt already.

 

[Nords]

Nords, hopefully one or more of you will be presenting the Roth/TIRA decision process. I've met a few Roth diehards (perhaps hardheads would be another name for them) who were such strong advocates that you could not reason w/ them.

I might as well just save everyone the trouble and [-]shoot myself in the head[/-] blog about whether or not to pay off the mortgage.

I set one up for DD a few years ago but she doesn't pay a lot of attention to it. I need to point the benefits out to her again.

I think our daughters are related... I guess the good news is that the money sits there unmolested, not being day-traded or raided.

 

[Gatordoc50]

I don't know about lessons learned but we have employed our 2 children and contributed the max to their Roths. A total of 25k in contributions and their accounts are worth 30k. Not the greatest returns. My oldest is now out of college and she contributes the match to her 401k and then to the Roth. That is about the most she can invest. It doesn't make much sense to contribute any more to her 401 because she doesnt pay income tax due to her low salary.

 

[ronocnikral]

Is there a way, if investing for a child, that you can make sure they don't yank all the contributions out? I know eventually you have to let go, but rational decision making with money while a teenager and in the 20's usually is trumped over the need for instant gratification. So, what can keep a kid from cashing out the contributions, heck, if they didn't even contribute much, they may want to just eat the tax and penalty on the earnings.

So, other than scare tactics (the world will implode if you take out your money), not fully educating your kids (not telling them contributions are fair game) and raising 'em good (they are model young adults and save), what other protections are there that they won't cash out their contributions (or the whole thing) to throw a party of a lifetime (free booze and drugs!) for the entire campus.

I assume this is all chalked up to tuition at the school of hard knocks, as the IRS won't let you "co-own" a Roth IRA account. But, it would be interesting to hear if there is anything you can do...

Nords, hopefully one or more of you will be presenting the Roth/TIRA decision process. I've met a few Roth diehards (perhaps hardheads would be another name for them) who were such strong advocates that you could not
reason w/ them.

edit: Oh, and I was going to respond to kaneohe's comment as well. I agree with this. I surf the PF blogs from time to time, mainly for entertainment. I am floored about blanket statements like, you should always max out your roth IRA, roth is better than TIRA, taxes will only go up, if you think you'll be in a lower tax bracket in retirement, you're not aiming high enough etc. It'd be nice if someone would report on when is a good time to invest in each and the considerations. Not just about doing roth conversions in the 35% tax bracket, which probably doesn't make sense for most people.

 

[ziggy29]

I am floored about blanket statements like ... if you think you'll be in a lower tax bracket in retirement, you're not aiming high enough...

I'd turn this one around -- If you earned considerably more than your expenses and you aren't in a lower tax bracket in retirement, you may have w*rked too long....

 

[ronocnikral]

it's hard to break the optimism of young bloggers who have already solved life's riddles since graduating from college 3 years ago.

 

[W2R]

In retirement, my TSP is a million times more important to me than my Roth IRA.

Part of that is due to the much low contribution limits for a Roth IRA. Because of these limits and the fact that I got started very late with it, mine is small.

Since it is so small, I use it for what UncleMick would call his testosterone investing - - investing by instinct instead of by plan. In my case, I guess estrogen investing would be the appropriate term. My boring old planned investments, which are more than 99% of my portfolio, are doing much better than my estrogen picks. Even if yield was taxable instead of being in a Roth, it has decreased so much that there are no gains upon which to be taxed.

 

[rescueme]

it's hard to break the optimism of young bloggers who have already solved life's riddles since graduating from college 3 years ago.

+1

 

[packrat44]

When my son and daughter got their 1st paying summer jobs I helped them set up ROTH IRAs and matched their contributions dollar for dollar. They still max out their ROTHs besides contributing heavily to their TSPs and 401(k)s.

 

[Nords]

Is there a way, if investing for a child, that you can make sure they don't yank all the contributions out? I know eventually you have to let go, but rational decision making with money while a teenager and in the 20's usually is trumped over the need for instant gratification. So, what can keep a kid from cashing out the contributions, heck, if they didn't even contribute much, they may want to just eat the tax and penalty on the earnings.
So, other than scare tactics (the world will implode if you take out your money), not fully educating your kids (not telling them contributions are fair game) and raising 'em good (they are model young adults and save), what other protections are there that they won't cash out their contributions (or the whole thing) to throw a party of a lifetime (free booze and drugs!) for the entire campus.
I assume this is all chalked up to tuition at the school of hard knocks, as the IRS won't let you "co-own" a Roth IRA account. But, it would be interesting to hear if there is anything you can do...

How well did the above methods work when we were teens/20-somethings? Or maybe that's why you're asking the question in the first place.

You're right, the IRS won't let you co-own a Roth IRA. But if control over the funds was your primary concern then you'd have put them into a trust to be paid out to the beneficiary in steps over the coming decades. Otherwise you have to [-]hope[/-] choose one of those other methods.

When we first started giving our daughter an allowance (shortly after she realized that money was not very tasty or digestible), we used to keep an image in our minds of her setting the money on fire to watch it burn. The [-]Yu-Gi-Oh! cards[/-] reality wasn't much different, but eventually she got better at managing the money. The goal was to teach a skill, not to task her to preserve a depreciating collectible fiat commodity.

I don't even remember what our daughter's Roth IRA contributions are anymore, let alone the account value, but she's had the account for at least six years and at least three of those years she put in $5000. I'm sure the balance is over $20K, and with W2R's Wheee! ride it might be pushing $30K. I remember that our daughter worked her Kumon job for over three years and for so many hours that the franchise owner paid her more salary than we'd paid in as tuition over the preceding decade. And yet the owner and us parents both felt as if we got the better part of that deal.

If our daughter starts yanking out the contributions to buy herself a really sweet ride then we'll know how far along the money-management continuum she is. One more teachable moment. It'll certainly provide a framework for a good discussion, should she ever choose to bring up the subject. Otherwise I suspect that buyer's remorse would eventually kick in and she'd vow to keep that car until 2030. But she's also been threatening to buy a Shelby GT Cobra and re-engine it to make it an EV. There's a lot of room under that hood for a tire-squealing squirrel-cage induction motor.

My #RothIRAMovement post goes up in a couple hours (0001 EDT 27 Mar) and it mentions that she can withdraw her contributions to buy herself the car of her dreams. I don't think I've ever specifically mentioned that to her before, and especially not in the context of buying a car. But I stuck it down at the end of the blog post, so we'll see whether she's really reading them or just subscribing to the blog to make me feel better. Either way my conscience is clear!

edit: Oh, and I was going to respond to kaneohe's comment as well. I agree with this. I surf the PF blogs from time to time, mainly for entertainment. I am floored about blanket statements like, you should always max out your roth IRA, roth is better than TIRA, taxes will only go up, if you think you'll be in a lower tax bracket in retirement, you're not aiming high enough etc. It'd be nice if someone would report on when is a good time to invest in each and the considerations. Not just about doing roth conversions in the 35% tax bracket, which probably doesn't make sense for most people.

Well, I know our tax bracket is going to jump from 15% to at least 25% in 2022 when my spouse starts her pension. I haven't done much research since we arrived at that conclusion, but at the time Fairmark seemed to have the best conversion calculators and the best discussion of the parameters. IIRC they were even digging into the amount of conversion taxes to be paid from outside of the IRA as well as the tax impact of TIRA RMDs on when to take SS distributions.

Guide to Roth IRA, 401k and 403b Retirement Accounts

But then I have two mortgages in ER, and they won't be paid off until I'm 80 years old.

it's hard to break the optimism of young bloggers who have already solved life's riddles since graduating from college 3 years ago.

I spent a couple days at USAA's blogger conference with 16 other bloggers. As the resident geezer I was older than many of the USAA execs and all of the bloggers. I had at least 20 years on most of the crowd, and 25 on a few of them. When I say "a couple days", I mean that in the context of not being certain that a few of them even actually slept during that time-- they were either buzzing around USAA's building during the days or remembering the Alamo at 2 AM.

Anyway I found them to be very energizing and a lot of fun to be around. One of them founded MANteresting.com. Another founded LoveDrop.com. A third founded ArmyWifeNetwork.com and has co-written a best-selling book. (She used a Facebook opinion poll to beat the crap out of USAA's banking VP about offering business checking to military spouses.) A fourth is one of Illinois' top CFPs, and I don't think he's even 30 years old yet. A fifth is the editor of The Military Advantage book and regularly writes for Military.com. Not a slacker or a loser in the bunch, and I think they've earned their optimism. They certainly earned mine.

In retrospect I felt lucky to make the cut to get the USAA invitation. They're talking about doing another one in November, and I can't wait to see who shows up.

 

[ronocnikral]

i enjoyed your article. It's interesting to know that you can essentailly pay your child for work around the ol' ponderosa and count that as income. And even more interesting that they don't have to pay FICA and potentially, their income is so low that they most likely won't have any tax liability, essentially making the Roth an excellent deal!

Thanks!

 

[ERD50]

it's hard to break the optimism of young bloggers who have already solved life's riddles since graduating from college 3 years ago.

One of the cleverest, truest song lines ever: "I was so much older then, I'm younger than that now!"

I guess Dylan was about 25 ( 23 -looked it up) when he wrote that? Doesn't seem possible - what insight at that age. Amazing.


-ERD50

 

[Nords]

i enjoyed your article. It's interesting to know that you can essentailly pay your child for work around the ol' ponderosa and count that as income.

Thanks!

 

[stoutboy]

Roth vs. TIRA is not an open and shut case in favor of the former. My guess is most people who participate in FIRE earn better than average incomes. But when the median HOUSEHOLD income is less than 50k per year, and the median personal income is less than 29k per year, there are a lot of people who would be better off with the immediate tax benefits of the TIRA.

 

[Nords]

Roth vs. TIRA is not an open and shut case in favor of the former. My guess is most people who participate in FIRE earn better than average incomes. But when the median HOUSEHOLD income is less than 50k per year, and the median personal income is less than 29k per year, there are a lot of people who would be better off with the immediate tax benefits of the TIRA.

Oddly enough, you've just described the income parameters of a large portion of the U.S. military.

The forthcoming "conventional wisdom" for those junior members with low incomes is that they should contribute after-tax dollars to their Roth TSP account instead of contributing before-tax dollars to their TSP. The thought is that the immediate tax benefit pales in significance to the later costs, and the tax benefit really isn't very much. And, yeah, I know, the tax benefit of putting $17K before-tax income into the TSP is hypothetically $1700 in most servicemember's pockets.

I guess the issue is that if these people can only "save money" through a $1700 tax benefit then they probably have bigger savings problems than the Roth vs TIRA debate. It reminds me of the people who "save money" by being overwithheld from their paychecks so that they can get a big refund.

I'll have to take a look at the numbers and do a spreadsheet. The issue with these research projects is that one of these financial-analysis blog posts takes as much time to write (and error-check) as it would to write 3-4 other blog posts. It's the kind of research from which only an economist like Wade Pfau would benefit.

 

[stoutboy]

The difference with the military being that, as for now at least, they have probably the best-remaining pension out there. And free health care while on active duty.

Even in the case of the military, particularly the enlisted ranks, I think it is unrealistic that most would be able to set aside 17k per year in the TSP, all the more so those with families.

As for the people who fall into the economic category I described, the vast majority are non-military, so they lack the security of a pension, have to pay for health care (if they can afford it) along with all the other costs of life.

Most of these folks just aren't able to save the appreciable amounts that would justify a Roth. They are not going to be in a higher tax bracket after they are no longer able to work. So for these people, they are probably better off using a TIRA. For the more fortunate ones whose circumstances change in the future, I suppose they could always convert to a Roth at a later date.

Oddly enough, you've just described the income parameters of a large portion of the U.S. military.

The forthcoming "conventional wisdom" for those junior members with low incomes is that they should contribute after-tax dollars to their Roth TSP account instead of contributing before-tax dollars to their TSP. The thought is that the immediate tax benefit pales in significance to the later costs, and the tax benefit really isn't very much. And, yeah, I know, the tax benefit of putting $17K before-tax income into the TSP is hypothetically $1700 in most servicemember's pockets.

I guess the issue is that if these people can only "save money" through a $1700 tax benefit then they probably have bigger savings problems than the Roth vs TIRA debate. It reminds me of the people who "save money" by being overwithheld from their paychecks so that they can get a big refund.

I'll have to take a look at the numbers and do a spreadsheet. The issue with these research projects is that one of these financial-analysis blog posts takes as much time to write (and error-check) as it would to write 3-4 other blog posts. It's the kind of research from which only an economist like Wade Pfau would benefit.