TromboneAl said:
So, who's giving better answers to this: us or the people on Vanguard Diehards?

Is this for your kid or a nephew/niece?
I've thought about a Roth for my daughter. It sure is attractive: money in an aggressive investment compounding for 50 years!
But I decided not to do it.
Can you tell us more about your reasons for creating the Roth?
Man, I'm beginning to regret posting at the Diehards. I've had good advice there in the past but this question seems to have shaken a nut or two out of the tree. I've also posted at Ed Slott's board but neither their CPAs nor my brother-in-law the CPA have ever heard of anyone attempting this. (He sees a lot of high-income taxpayers.) So I think the Vanguard crowd just doesn't know what to say about the situation (or they don't have school-age kids). No doubt they'll be ready to tell me just what funds I should buy. And as I get closer to picking a fund then I might also post at FundAlarm.
But here's the concept. It's for our 12-year-old kid. Our college savings are on track in a small UTMA and we've held a few of our Berkshire-Hathaway shares in reserve (still parent's money). I think college is fully funded as far as parental consciences are concerned. I'll help with scholarship searches but the rest of that is up to the kid. She's been a straight-A student so far (purportedly by being born to the world's meanest parents) and it'll be interesting to see how that survives the next five years. Besides I can always introduce her to my good buddy at the Navy Recruiter's office.
I would have expected that colleges would count Roth contributions against their students' financial aid. But as you say, I don't think they have much experience with it and it's a great loophole. The nice thing is that, if desire exceeds funds, she can tap into the Roth without a penalty but yet with taxes. The nicer thing is that we don't have to pay for those credits in underwater basket weaving and she'll have her own assets at stake before she's overly generous with her money (instead of ours). Tapping a Roth requires a deliberate decision (and more income tax) than just whipping out Dad's credit card, and it's good practice for later in life when other Roth-tapping situations arise. The earlier she practices these risk-reward decisions in our household, the better she'll do when she moves out.
She's starting to show the beginnings of interest in saving for college and we want to fuel that feeble flicker. Right now it's mostly caused by watching Nickleodeon sitcoms & commercials but hey, it's a start. Like most of us I saved some of my teenage job money for a few years in a passbook savings account and it was drunk gone about 18 months after matriculation. (Wait'll I tell her about her genetic susceptibility to alcohol poisoning.) I agree with you that the earlier she starts thinking about putting that money aside, and the easier it is, then the better it'll work. When her money-grubbing instinct resurfaces I want to be able to say "How 'bout putting it in your Roth IRA?" and hopefully it'll be a little slower to squirt right back out of her pockets again...
I agree that we don't need to be funding the kid's retirement or other expenses and I'm mildly concerned about TMND's Economic Outpatient Care. One day this may backfire on us and we may have to say to her (or her significant other!) "Didn't we put that money in your Roth IRA for just this sort of situation? Remember, withdrawals are taxable. Good talking with you, call again soon!" Ideally this Roth IRA will compound in complete neglect despite the pressure of homes & graduate schools (or just raising a family). But there are mitigating factors:
- Ya gotta know your kid. Ours seems amenable to LBYM despite heavy peer pressure. She's aghast at the cost of Roxy while she enjoys bragging about shopping at Goodwill. Last month she got the gimmes for an iPod but, after some experimentation & consumer education (and a few tears), she shopped hard for a $10 CD player. I think she gets it.
- Hawaii's home prices are high but apparently sustainable. If it's a choice of jump-starting a Hawaii home purchase in 10-15 years or of flying to the Mainland to visit our kid, then I'd rather start charging the battery now.
- The kid has abandoned the sport of dressage, which sucks money out of one's pocket almost as fast as owning a boat. So we have a little slack in this year's budget, my spouse had had some P/T work, and we'd hate to lose a compounding opportunity. Next year may not be as flexible. Some money today is feasible, who knows what tomorrow's budget will support. Tax-free compounding makes it even better than the prospect of more at a later date.
- The kid is arguably (er, to the IRS, negotiably) old enough to perform rental-property management chores (painting, lawn care, bill paying, tax forms) and household domestic slave labor. (Gosh knows I could use a teenager who can swing a paintbrush and a chainsaw.) Of course she'll continue to swab toilets, haul trash, set the table, prepare meals, and clean her assigned field day spaces just for the awesome privilege of being a member of this family.
- It seems like a good way to encourage learning home maintenance/repair skills. She used to rake leaves & cut grass because Grandma & Grandpa appreciated the help. Now motivation isn't so easy, and instead of the labor just putting money in her pocket for yet another Jamba Juice, this could make her feel like she's helping herself to pay her college bills. I'll do any amount of subsidizing to encourage that independence.
- This eliminates all her pressure & resentment over having a personal car. (Not that we were ever buying her one in the first place!) When the other rich kids (of poor parents) say "How come your parents didn't buy you a car like mine?" she'll be able to defend her peer status with "Because they're putting my earnings in a Roth IRA for college and a home down payment." That immediately goes on the kid's gossip network ("Hey, Mom, guess what her parents are doing!") and starts many of our interesting conversations with our neighbors. I'd be a hypocrite if I claimed that I didn't enjoy that.
TromboneAl said:
But I'll wait and see how things go with the college stuff. One thing I've found is that at this point, her money and mine are, in a sense, the same thing. For example, if she puts $500 into a Roth, that will just mean that I will be spending $500 more on college tuition. So it will really just be me putting $1,000 into the Roth.
But one benefit of having the Roth for her is that it makes it easier, at least psychologically, for her to send in some more money, since the account is already there.
Bottom line is that today we can do something nice (yet educational) to prepare her for her future. That may not be as achievable in later years and the compounding opportunity will be gone forever. I especially agree with your thoughts on helping fund her Roth IRA instead of her just spending our money, and of making it easier for her to keep funding it!!
ESRBob said:
Had a brainwave on what a sole proprietorship could hire a kid to do that could reasonably eat up 4k a year in legitimate expenses: have them build, modify and maintain a website for the enterprise, as well as look after computer equipment. Not only does this feel legitimate, it also teaches your kid useful skills they could go outside and earn money with, too.
Go#&^@% it, Bob, I was saving that one for the IRS' Regional Revenue Office! She started making websites in her sixth-grade class and with today's software & free websites it's a lot easier than in the mid-90s. So keep it under your hat... otherwise she'll be duking it out on Google searches with TH's kid.
But I still have one other idea.
ESRBob said:
Since you are whisking their hard earned cash away from them so mercilessly, you could offer to buy them a cool new Zire or iPod or something. Or just tell them that money is for saving, not for spending. Whatever works.
David Owens claims in one of his
books that "saving for college" is light-years away from a kid's psyche. Parental attempts to encourage that cause them to question adult sanity and, even worse, to splurge the money as quickly as possible to avoid having it repossessed for "savings". So it might not be successful with more than a few hundred $$... but every compromise helps.