Roth IRA options for minor with < $1K?

[Guest displayname]

My daughter ( <18 yo) has $850 of earned income.

I would like her to invest this in a Roth IRA. I assume this is possible, but am running into problems.

Problem is, Vanguard (where I have all my accounts) has very high minimum investments, and Fidelity has high minimums, and won't issue any Roth accounts to persons under 18 years old (yo).

Assuming persons <18 yo are allowed to establish Roth IRAs (which I don't know if it is true or not), then what we are looking for is:

Goal: Establish a ROTH IRA for a person <18 yo with $850 earned income

Requirements:

1) fund company allows ROTH IRA for persons <18 yo

2) minimum ROTH IRA investment must be under $850

3) money market fund AND/OR passive (not managed) total stock market index fund that tracks Wilshire 5000 or similar index (i.e. not just large caps)

As long as we're asking, we'd prefer:

1) low expense ratio (under 1% preferred)

2) low or no management fees + other advertising fees

Any ideas?

[John G]

Good Idea.

This topic has come up before - you can find info by keyword searchs using "child" and "children".

Yes, you daughter can have a Roth. There are no IRS age limitations for IRA/Roths. Custodians sometimes have limitations, but that is a custodial issue not an IRS issue. Schwab says yes. Etrade says no. You will have to make some phone calls to ask about children's Roth accounts.

If your daughter will also have "earned income" in 2007, you can increase the initial contribution by pre-funding 2007 even though you daugher has not yet received the earned income.

Another option is to elect the automatic contribution approach - say $100 per month from your checking account. The minimums are often waived for auto plans.

Consider using this project as an education opportunity for your daughter. Very few teenagers or 20/30 somethings know anything about stocks, bonds, or mutual funds. Kids seem to get more interested when they can see their assets grow.

PS: I started Roths for my two daughters when they were around 16. They both just started working after college. When I add the 4K this month, their accounts will be over $30k, and they both know that when they retire the existing assets (with no additions) are likely to over $1.4 million. My wife and I view this a premptive estate planning coupled with economic education.

[Guest displayname]

This topic has come up before - you can find info by keyword searchs using "child" and "children".

Thank you for your response.

Previous messages that I found established that (a) minors can set up Roth IRAs, and (b) you have to look around for a place to invest it because few places accept Roth IRA investors <18 yo .

The only specific recommendation was Charles Schwab and Janus. I will check them out, but not sure that they will have good expense ratios, or that they have the funds I want.

I was hoping for something more definitively addressing my original question.

Goal: Establish a ROTH IRA for a person <18 yo with $850 earned income

Requirements:

1) fund company allows ROTH IRA for persons <18 yo

2) minimum ROTH IRA investment must be under $850

3) money market fund AND/OR passive (not managed) total stock market index fund that tracks Wilshire 5000 or similar index (i.e. not just large caps)

As long as we're asking, we'd prefer:

1) low expense ratio (under 1% preferred)

2) low or no management fees + other advertising fees

[papogi]

It's worth checking out Steward Funds. I was in the same boat as you with having a daughter that could have a Roth IRA. I got into the Domestic All-Cap Equity Fund (they offer others, but this one tends to mirror the overall market). While it would not be my first choice as a mutual fund, it fit my requirements of needing to have a low minimum, needing to allow Roth IRAs for minors, needing to be no-load, and having reasonable (slightly high, but not terrible) expense ratios.

http://www.stewardmutualfunds.com/ME2/Audiences/splash.asp

[Guest displayname]

Here's my results so far:

No

---

Vanguard -- no [high minimums]

Fidelity -- no [high minimums, no < 18 yo investors]

Wells Fargo -- no [$1K minimum]

Charles Schwab -- no [high account minimums]

State Street Global Advisors -- no [no < 18 yo investors, no index funds]

Buffalo -- no [no index funds]

Still looking.

[Guest displayname]

It's worth checking out Steward Funds. I was in the same boat as you with having a daughter that could have a Roth IRA. I got into the Domestic All-Cap Equity Fund (they offer others, but this one tends to mirror the overall market). While it would not be my first choice as a mutual fund, it fit my requirements of needing to have a low minimum, needing to allow Roth IRAs for minors, needing to be no-load, and having reasonable (slightly high, but not terrible) expense ratios.

http://www.stewardmutualfunds.com/ME2/Audiences/splash.asp

Thanks for the link. Doesn't seem to have any index funds.

Looks like I am going to have to compromise on wanting low cost index funds.

[Guest displayname]

AARP Mutual Funds just added a money market fund with a low enough minimum!

Admitted, it has a negative return (so far) without fee waivers, but I trust they will keep waiving so as not to break the buck.

It's the least-bad option so far for preservation of capital for 2 or 3 years until other funds will deign to let us invest.

http://www.aarpfunds.com/

Not exactly thrilled, but it's a port in the storm.

[John G]

This message is not an endorsement of any brokerage, just an example of how to solve you dimema.

I confirmed today that Charles Schwab does allow custodial Roth IRA accounts for kids - but, hey, didn't we already know that? The minimum to open an account is apparently $2,500 but I was advised by a supervisor that as in many things at Schwab, the local branch rep has the authority to make some exceptions (no further information was provide about the basis for an exception but other business with Schwab and/or automatic payment plan come to mind). The annual custodial fee at Chuck's place is $20 each December, but is erased when household assets at Schwab (this or any other account) exceed $10,000. I know that some reps will waive this if you just ask!

Schwab has about 20 index funds with no transaction fees or loads. They have "thousands" of non-index no load no transaction fee accounts. Surely, there is something that will give you reasonable results.

A plan:

Option 1: Talk with your local Schwab office in person and see if they will reduce the minimum.

Option 2: Take the $850 for 2006 and add $1650 for 2007 and presto chango you have the $2,500 minimum for starting at Schwab.

Select an index fund or any other no load no transaction fund and continue for a few years. At some point you will blow by the $10k (or they may reduce it) and no longer have an annual custodian fee. Or, transfer other household assets and get their sooner.

Remember, I am not proposing a life time arrangement, but rather just something to get you started. A few years from now you can transfer the assets anywhere you want.

Don't obsess over the annual expense percent or the annual custodian fees. The performance of your selected fund is much more important. I wonder if you think that having ultra low expenses guarentees you the best return? Nope. It doesn't work that way. Someone who owned a portfolio of the Dow industrials made over 16% in 2006. The often touted S&P500 was about 3% lower than that, and the Nazdaq was more than 6% lower than the DOW. That was 2006, no one can tell you who will win the horse race in 2007. Lets look another way at performance and expenses. Those clever folks who had money in Office Building REITS last year suffered terribly from annual expenses of 0.80 to 1.25% and some were even in loaded REIT funds... but don't cry for them, that sector was up 45% according to an industry association report that just hit my email.

I don't know who you talked with a Fidelity or if you were looking at their website, but you apparently missed this info:

The Fidelity SimpleStartSM IRA offers an easy way to start investing in a Roth or Traditional IRA and may help you stay on track for retirement. A SimpleStart IRA can be established with as little as $200 through automatic monthly contributions, and you avoid the $2,500 initial investment on most Fidelity funds (FundsNetwork® funds not eligible).

I think if you make a few more phone calls or try some of the options above, you will be able to cobble together some kind of plan that will work. You might also talk to a couple of local banks... they won't have the best of index/mutual funds, but they may be more lenient about miminums and ages. You have set up some reasonable requirements, but you may find it all exactly as your want.

[Guest displayname]

Thank you for spending so much time on your response. The more I learn about the AARP funds, the more interesting they look. In fact, they are all differently weighted portfolios of SSgA Index funds. This is just what the doctor ordered. The money market is a short term idea, but I expect to make use of the AARP Aggressive Fund.

the local [schwab] branch rep has the authority to make some exceptions (no further information was provide about the basis for an exception but other business with Schwab and/or automatic payment plan come to mind).

I don't prefer to beg my way into being a customer. Just my opinion! Besides that, there's not enough $ to fund a monthly AIP. If it were truly the only way, I would consider moving assets, but I would def. resent it.

This experience has truly opened my eyes how expensive it is to be "poor."

Option 2: Take the $850 for 2006 and add $1650 for 2007 and presto chango you have the $2,500 minimum for starting at Schwab.

$850 is the 2006 and 2007 (projected) earnings combined. Such a good idea I already thought of it...

Select an index fund or any other no load no transaction fund and continue for a few years. At some point you will blow by the $10k (or they may reduce it) and no longer have an annual custodian fee. Or, transfer other household assets and get their sooner.

It will take 13 years at 9.5 % to "blow by" $ 10 K. Getting started is hard.

Don't obsess over the annual expense percent or the annual custodian fees.

The difference between a $10 annual fee (AARP) and a $50 annual fee (Schwab) results in nearly 10% lower account balance (~$1K on a $10K account) by year 13, under the above scenario).

Not totally fair to compare, because Schwab provides more services and more investment options, if needed.

The performance of your selected fund is much more important.

I am investing in a broadly diversified total U.S. market index fund, or the same with an EAFE index. It's a given that with index funds, fees make (almost) all the difference.

I don't know who you talked with a Fidelity or if you were looking at their website, but you apparently missed this info:

Fidelity does not open Roth IRAs for persons under 18 yo.

Again, thanks for the comments, you have made me think about my assumptions. Plus the AARP funds seem like they are trying to do the right thing: actually seek the young, small savers and provide index funds to them.

Signing off now!

[John G]

"It will take 13 years at 9.5 % to "blow by" $ 10 K. Getting started is hard. "

I assumed that you were starting a systematic program of investing for a Child rather than just an initial amount. If you could put in $2k per year, you would "blow by" in about 4 years. If you just wait for the first contribution to grow to 10K, then it will take a lot longer.

Beg is the wrong term. You are a valued new customer - and customers ask for service. A few decades ago everything was full service brokers and commission sales mutual funds... and don't even ask about minimum initial deposits.

The trend has been faster, quicker, increased choice, lower fees, more efficiency (Fidelity used to be the single largest buyer of postage! With email notifications, I suspect their costs have dropped a lot.), better information, etc. When I am considering developing a new relationship (car dealer, bank, broker, or fund family) I expect the company to work for me, or I take my business elsewhere. Frankly, the financial industry is a lot more like commodity then some elegant/boutique service. The companies that don't change wither and upstarts blossom. A lot of folks don't remember when Charles Schwab pioneered the discount brokerage, or when Bogel invented the index fund. There is no reason to "resent" a relationship either, if it doesn't work, just more on. Or as Donald Trump might say, "nothing personal, it's just business".

The IRA annual fee at Schwab is absolutely NOT $50. I made two different calls and got the same number $20, and my local rep would absolutely waive the fee to get a new account. I didn't ask if that meant every year or just the first.

[Guest displayname]

"It will take 13 years at 9.5 % to "blow by" $ 10 K. Getting started is hard. "

I assumed that you were starting a systematic program of investing for a Child rather than just an initial amount. If you could put in $2k per year, you would "blow by" in about 4 years. If you just wait for the first contribution to grow to 10K, then it will take a lot longer.

Unfortunately it does take over a decade of $400-ish yearly contributions to get to $10 K. Assembling a significant chunk is hard because it takes diligent, consistent effort, and there doesn't seem to be any worth to the first few investments.

That said, we've just got to gut it out and put away everything we're eligible for. Hopefully, more funds will be eligible later.

Then when she really pays attention later, saving won't appear bleakly unrewarding.

Sorry to be such a downer! But, getting started is hard!

The IRA annual fee at Schwab is absolutely NOT $50. I made two different calls and got the same number $20, and my local rep would absolutely waive the fee to get a new account. I didn't ask if that meant every year or just the first.

I checked my notes from all my phone calls to various companies. The note on Schwab says $50 is a low balance fee. I forgot to ask if there was a separate account fee or if that included it. If I were still investigating I would def. call back Monday to clarify the situation.