How to Open IRA for Children
[0:16] How old do you have to be to open a traditional IRA?
[0:42] Here’s one great way to get your child earned income!
[1:18] With no age limit to buy IRA accounts, you may want to start at a fee-free bank.
[1:53] Can the owner of the IRA guardian or parent contribute money?
[2:31] There are only two limits to the amount of contribution: income and yearly.
[3:00] Even grandparents can contribute to the child’s IRA!
[3:27] Here’s what the parent needs to get started.
[4:29] As the parent, be informed so you can direct your child’s IRA!
[4:54] See how powerful investing in your child can be!
[5:17] What is the best type of IRA for your child?
[5:48] Find out how to use your child’s IRA to teach them the value of savings!
[6:09] See what important topics are coming up soon.
Setting Up and Funding an IRA for Your Children and Grandchildren
We’re continuing with the theme of Taking Care of Your Loved Ones this week. Today, the topic is about setting up and funding an IRA for your children and grandchildren. It’s never too early to start. Starting an IRA early gives your children the advantage of compounding extra money over their lifetime. Here are a few tips to starting an IRA for your children as early as possible.
How Old do you have to be to have an IRA?
For an IRA, there is no age limit; however, you must be earning W-2 income, which means earned (and, therefore, taxable) income. Now, many of you may be saying, “my granddaughter’s only 8. How can she get a job that pays her W-2 income at that age?” That’s a fair question. But don’t worry. She won’t need to take an afternoon shift at the 7/11 or sharpen her barista skills to work at Starbucks. If you own a business, you can hire your loved ones as marketing talent. Use their picture in an ad or use them in a commercial. You can get creative, but don’t push it. There are many legitimate ways to employ your family members without flat-out lying.
Funding Your Child’s IRA
Once the child has reached 15 or 16 and is working independently from you and your company, then they may contribute to their own IRA. However, the great part is that they don’t have to. Once the IRA holder is receiving W-2 income, anyone can contribute to the IRA; grandparents, parents, and even aunts and uncles.
Note: you cannot fund the IRA for more than the amount earned in that year.
For instance, my child, who is 16 and works at a local restaurant earned $4,000 in taxable income; therefore, I would only be able to give a gift of $4,000 to his IRA. But, let’s say he earned $12,000 in taxable income, then I would be able to give a large enough cash gift to reach the contribution limit for that year, let’s say for this year it’s $5,500.
Guardianship of a Minor’s IRA
As parent or guardian of the child, you will need to sign for the IRA until the child reaches the age of 18. Just like any IRA, this account can be a traditional, Roth, or self directed. Of course, you have to consider whether a self directed IRA is the right choice for the account at that time. If you aren’t sure if a self directed IRA is right for this situation, you can watch our video “Is a Self Directed IRA a Good Idea for You?”
Bottom Line: It’s Never Too Early to Open an IRA
Whichever way you decide to save for retirement, the idea here is to START EARLY. The compounding of money over the long haul can be shocking: a base for a flourishing IRA. So often in this business we hear people say, “Man, I wish I had started earlier. It’s just that no one told me.” This is a great way to give your children a head start. Not only is an IRA investment seed money for when they come of age, but it also teaches them the value of saving and the value of compounding money over time. Take this opportunity to teach your children the value of money, while also giving them a solid base to work from for their future retirement.
So this month in Tuesday at Two, we are talking about taking care of those you love. Today’s topic is going to be setting-up and funding an IRA for your kids.
One of the first questions we get is how old do you have to be to have an IRA? The neat thing about IRAs is that unlike real estate and some other things that you have to be 18 to own, anyone can have an IRA. The only stipulation is that you have to have W-2 Income.
You might ask, “Well, Terry, how can my three year old granddaughter have an earned income?” The answer to that is that I’m sure several of you have seen your favorite realtor has got a picture of a kid in their advertising or they have a video. Here in Albuquerque, we have a lot of used car commercials where they have their kid in there saying something. The kid is working and so you can pay that kid for doing that work. If you own a business and they earn income that way, then they can have a self-directed IRA or just an IRA.
It might be best for you at that level when they’re young and just contributing a little bit, just to have an IRA at your bank or brokerage house where they don’t charge you fees for it until they build up enough money to make it worthwhile to have a self-directed IRA.
There’s no age limit on the IRA. They just have to have W-2 Income. When your kid gets to an age where they can start working, 15, 16 years old (I guess 16 probably is how old you have to be to work), once they start earning an income, then they can have an IRA.
The question then becomes – [who funds the IRA]? I know when I was sixteen years old and working, I didn’t want to take the money that I earned and put in an IRA because I was sixteen years old, and I’d probably never get to use that or at least I thought I’d never get to use it. The money that I earned I wanted to spend.
What can happen is, as long as the kid has W-2 Income, anyone can fund the IRA. In that case, I might earn $1,000 a year as a sixteen-year-old kid and then my parents or grandparents or anyone could contribute $1,000 to the IRA for the [me]. It would be like a gift. The only limitation is you can’t fund more than what was earned and then you have the regular funding contribution limit of $5,000, or I think it is $5,500 this year.
If I earned $6,000 as a 16-year-old kid working somewhere, we could only fund up to the limit, which I think is only $5,500. Those change every year. The money doesn’t have to come from the kid himself. I could still go out and earn the money, but my parents or my grandparents or someone else could start putting the money away for me for retirement.
So you can just imagine if I started when I was 16 years old (and now I’m 54 years old) how much money I could potentially have in an IRA. It could really be a powerful tool for someone if they started young enough.
What we would need to get an IRA started for a kid is, the kid can have it, but then someone’s going to have to make the decision. If it’s a self-directed IRA (well, any kind of IRA), they’re going to require the guardian or the parent to make the actual direction of investment form signatures and other stuff. So we would have the kids sign the form if they’re able to. If they’re too young to do that, then obviously they couldn’t do so. The parent would sign it, but we would also have a parent or guardian sign it. We would require the parent’s or guardian’s government issued picture ID. If the kid has one, that’d be great too.
Then what happens is, until they reach the age of 18, we would have the parent make those decisions and sign the directions of investment and give us the market value reports and all that. Then at 18, we would convert all of that over and the child themselves would be the one to sign all those direction of investment forms and everything.
The last question was about self-directing your child’s IRA, and yes, you can do that, is: if you’re the parent or guardian, could you self-direct it and you can have them invested in certain things?
The really exciting thing about that is just the time that you have before they can start using that account. If you start when you’re 16 years old and then 54 years old, that’s about 38 years so, even if it didn’t get funded every year or even if we didn’t get a huge return, the compounding of that money would create a very valuable account. It’s something to think about and it’s a way that you can use an IRA.
The child is not going to pay any taxes on the money that goes in because it’s tax deductible—if it’s going in through a traditional account. Really, one of the most exciting things is to create a Roth account for them so that now that money goes in, it’s not tax deductible, but as a child, you don’t earn enough income so that you pay a lot of income tax anyway. You could put it in a Roth account and then when it builds up over the time that we’re talking about, all that money can come out tax free.
It’s really exciting and a very powerful tool that you have if you start now when your kids are young. [You’re] not only starting the IRA for them, but you might even consider having them put some of their own money into it so that they can learn the value of saving and what that’s going to do for them over time, and show them every year how that balance continues to grow and grow.
It’s an exciting thing to do. A lot of people probably aren’t aware of it or just haven’t even thought of it, but it’s a very powerful tool.
Next week, we’re going to be talking about beneficiaries. We’ve talked a little bit about that in January because we were talking about cleaning things up and setting goals and all that, but next week we’re going to talk specifically about beneficiaries and how important it is to name beneficiaries and continued beneficiaries and how to go about that, as well as how to keep that information up [to date].
So we look forward to seeing you again next week on Tuesday at Two.
How to Open IRA for Children was published on: