Funding a child's Roth IRA when they work

[gwraigty]

An issue would be initially opening the account, since fund companies typically require a minimum investment amount to open an account (e.g., $3,000 for many Vanguard funds).

So your child would have to contribute at least $1,500 to get started (and have at least $3,000 of earned income).

No. Forget Vanguard. Come on in to the 21st century. Schwab and Fidelity have no minimums to open a Roth IRA.

https://www.schwab.com/public/schwab/investing/accounts_products/accounts/ira/roth_ira

https://www.fidelity.com/retirement-ira/roth-ira

Both also offer no load, no transaction fee mutual funds with no or super-low minimums and NTF ETFs.

 

[gwraigty]

Potential downside I see is that you and they are locking that money away in a retirement vehicle, inaccessible without penalties. You are starting to build their retirement savings account, but perhaps the best way to support eventual retirement is investment at this age rather than saving. Money that could go to college, or grad school, or pay of loans for either, or a down payment on a first home, or purchase of a first car without a loan, all could be wise investments.


My high school and college summer jobs paid for my first car, and contributed to my first home down payment, I was certainly glad to have that money accessible in my 20s. It costs some real money to get your feet under you and running in life.

+1

When my husband suggested I encourage our daughter to contribute some of her summer job earnings to a Roth IRA, I brought up much of the above. Until a young person can support the basics of starting out in life, I'm not in favor of locking money away for the future.

 

[karen1972]

Are people sure Vanguard requires a $3k minimum? I had inquired for my sister and they said that wasn't true. That yes many funds required a $3k minimum, but you could open a ROTH IRA with much less and put it into the money market account until you had saved enough to invest in whatever funds you wanted. ie the minimum wasn't about the ROTH, the minimum was about the funds people were trying to purchase.

 

[gwraigty]

Are people sure Vanguard requires a $3k minimum? I had inquired for my sister and they said that wasn't true. That yes many funds required a $3k minimum, but you could open a ROTH IRA with much less and put it into the money market account until you had saved enough to invest in whatever funds you wanted. ie the minimum wasn't about the ROTH, the minimum was about the funds people were trying to purchase.

You're right, according to the fine print on this page:

https://investor.vanguard.com/ira/how-to-open-an-ira

Get started with as little as $1,000.*

*The minimum initial investment for Vanguard Target Retirement Funds and Vanguard STAR Fund is $1,000. A $3,000 minimum applies to most other Vanguard mutual funds. For ETFs (exchange-traded funds), the minimum initial investment is the price of 1 share.

I'd interpret that to mean they don't actually require $1,000 to open the account.

 

[cathy63]

Are people sure Vanguard requires a $3k minimum? I had inquired for my sister and they said that wasn't true. That yes many funds required a $3k minimum, but you could open a ROTH IRA with much less and put it into the money market account until you had saved enough to invest in whatever funds you wanted. ie the minimum wasn't about the ROTH, the minimum was about the funds people were trying to purchase.

Yes, you are correct that it's the funds that have a minimum investment, not the account that has a minimum required balance. Vanguard's Target Date funds have a $1K investment.

 

[The Cosmic Avenger]

One more tip, as long as they're 14 or over (no kiddie tax), an even better way to do this is to gift appreciated holdings and have them sell them to put in the Roth. Assuming their income is small as in the OP's case, they will be at 0% LTCGs, and you've shed a future tax liability. It's a little more complex in that it requires another investment account for them, but I'd think you could keep it open with just a few dollars in a sweep account.

Oooh, that's a good idea, thanks. We started using a donor-advised fund last year, and I donated appreciated stock and immediately bought it back (with the cash we saved to donate to charity) to raise our cost basis. We would probably do the same here, gift the kid the stock, then buy back that same amount.

But wait...if we gift it and they immediately sell it, wouldn't the recipient be subject to short-term CG tax, because they only held it for minutes/hours? ...

OH, I see! A gift of appreciated stock is taxed based on the donor's cost basis, so as long as *I've* held it at least a year and the *recipient* makes less than $38K, it's a 0% LTCG tax rate. Thanks, I just figured that out, and spelled it out in case anyone else is as dense as I am.

 

[hausfrau]

Potential downside I see is that you and they are locking that money away in a retirement vehicle, inaccessible without penalties. You are starting to build their retirement savings account, but perhaps the best way to support eventual retirement is investment at this age rather than saving. Money that could go to college, or grad school, or pay of loans for either, or a down payment on a first home, or purchase of a first car without a loan, all could be wise investments.

I agree, but they will still have their own earnings to save, invest, etc. Getting money into a Roth early seems like such a good idea to me. I think it's better if a young person has it "locked away" so to speak and it grows. I'm going to build this strategy into our retirement plan, along with braces and college, lol. Thanks to the OP for the tip. Honestly, something like this never crossed my mind.

 

[Vacation4us]

Fidelity has a no minimum Roth account under the name "fidelity Go". They manage the investments in index funds based on your goals.

ETF's have to be from the owners own account. I set my 19 yo up to transfer $50.00 a month and all tax returns go to the fund. It's not 6k a year but it's a start.

My kids have taught me a free ride teaches them nothing. I also attempted to help the older child do the same but he hasn't made the effort to return the correct ID to Fido so they have shut his account down twice.

 

[gerntz]

One more tip, as long as they're 14 or over (no kiddie tax), an even better way to do this is to gift appreciated holdings and have them sell them to put in the Roth. Assuming their income is small as in the OP's case, they will be at 0% LTCGs, and you've shed a future tax liability. It's a little more complex in that it requires another investment account for them, but I'd think you could keep it open with just a few dollars in a sweep account.

1. No tax assuming the LTLC are below $2100 & there is no state/local income tax. 2. The Roth contribution can't exceed the earned income.

 

[GLM]

Working on the grandkids....

We started matching our oldest child's ( DS) Roth contributions when he was in college. Roth's were fairly new then and we had just started our own the year before and realised how much better they are for young folks. Matched DD as well when she began working .

They are both very thankful now for the head start and financial brain washing to begin with good money habits.

We, with DD and her husband's blessing are working on the next generation . DD now has a 2 year old and a 6 month old . This article inspired me ...

https://www.marketwatch.com/story/make-your-kid-rich-for-1-a-day-2014-08-13
I have hard coppies of the article so the child can learn the orrigional purpose of the account.

The plan is to gift $1000 on the first birthday- then $365 annually . They are with Schwab which provides no fee custodial accounts with a $1000 minimum.

The grand kids have so much stuff these days I can't get into toys much.

 

[RunningBum]

1. No tax assuming the LTLC are below $2100 & there is no state/local income tax. 2. The Roth contribution can't exceed the earned income.

Why $2100? Assume you mean LTCG, don't know what LTLC are, but I'm unaware of such a limit.

It's true that there probably may very well be a state or local tax due. Worth factoring that in to see if it's worthwhile.

 

[RE2Boys]

When my boys started their first real summer job at 15 and 17, I didn't want them to "feel" rich with lots of free money, so I offered that I'd match any funds they put into a Roth IRA. Explained to them that while a savings account for retirement, if they ever REALLY needed some of the funds that they could withdraw a portion of the principle without any penalties.
Come near tax time, the 17 year old had turned 18 so could open an account at Vanguard and met the minimum deposit (with my contributions of course). But the now 16 year old could not on his own. As I had accounts at Vanguard, we opened a brokerage account (he wanted to "experience" the stock market) with me as the custodian. I don't recall any issue regarding a minimum investment but of course certain funds did minimums.

We're now in our fifth year of this arrangement. Of course, each year the limit of total contribution has been their wages for that year. They are both in college now.

 

[KenZ71]

I'm trying to talk my 16 year old into this.

Told him I would match his contributions but he didn't like the idea of being locked away so long.

Tried to explain the guidelines of withdrawal of principal but his 16 year old eyes glazed over.

 

[copyright1997reloaded]

One more tip, as long as they're 14 or over (no kiddie tax), an even better way to do this is to gift appreciated holdings and have them sell them to put in the Roth. Assuming their income is small as in the OP's case, they will be at 0% LTCGs, and you've shed a future tax liability. It's a little more complex in that it requires another investment account for them, but I'd think you could keep it open with just a few dollars in a sweep account.

I am thinking of doing a variation of this, if DC gets a summer job this year. I have money that I contributed to a UTMA account. The idea here is to withdraw $ from the UTMA to be placed in the Roth up to the amount earned. Some of that will be from securities with a profit, and I would limit the profit earned (i.e. sales) to be less than the $2100 income to avoid taxes on the account. The transfer should be OK in terms of IRS regulations in terms of to the benefit of the child (i.e. my custodial responsibility), but I need to do some more research on that front.

The result should be:
1) Less $ in the UTMA and subject to FASFA take away
2) The $ in the ROTH would not be counted for FASFA purposes
3) Tax gain harvesting of UTMA assets
4) DC has a better start towards retirement

 

[FlaGator]

I'm trying to talk my 16 year old into this.

Told him I would match his contributions but he didn't like the idea of being locked away so long.

Tried to explain the guidelines of withdrawal of principal but his 16 year old eyes glazed over.

He'll grow up to regret it, which is why I would not put up with that from my kids. My house, my rules, and I'm giving you money

Kids need to understand how fortunate they are to pay for as little growing up as they do, compared to their parents/grandparents/generations before that made their fortunate circumstances possible.

 

[SecondCor521]

This is a fantastic idea. It never occurred to me to do this. This is something I would like to do too. If a kid has a Roth, does it affect their college financial aid since it's their asset? I don't think we will qualify for aid anyway, so it's probably moot.

Retirement accounts, including Roth IRAs, traditional IRAs, and 401(k)s, are not included at all on the FAFSA. Most schools use FAFSA.

Some schools, mostly highly prestigious ones and selective liberal arts schools, use CSS Profile. CSS Profile may include retirement accounts, I'm not really sure.

 

[RunningBum]

OK, I see that over $2100 unearned income for those under 18 is taxed. I wasn't thinking about that since my son is older than that.

 

[sengsational]

Here's an article on the topic of funding a child's Roth account with "chore" money:


https://www.marottaonmoney.com/fund-your-childs-roth-with-chore-income/

 

[The Cosmic Avenger]

Here's an article on the topic of funding a child's Roth account with "chore" money:


https://www.marottaonmoney.com/fund-your-childs-roth-with-chore-income/

Interesting! This part was really helpful, as we had been discussing it in this thread and it still wasn't clear:

...the money that is contributed does not need to be the very same money they earned. Unlike a 401(k) plan, which requires salary deferrals in order to fund, you or anyone else can fund your Roth IRA with any money.