Open IRA for 10 year old?>

[Guest barry myster]

I have been doing alot of thinking,all this talk about SS going belly up in the not too distant future?.

and if it may happen I want to open an IRA (ROTH) for my daughter now at the age of 10.

I have read the basics on a IRA for minors,like having to keep records that she baby sat , dog walking etc.. for x amount of dollars yada yada....

how hard does anyone think,it would be to open an IRA for my 10 year old. (them letting me start ira for 10yr old)

I had done some calculations, just $25 a month for 55 years @ 10% intrest would be around $700k for my daughter when she is 65. I know that in 55 years $700k would not be much money, but it will be 700k more than I will have when i'm 65.

Thanks,

Barry Myster

[Guest mjb]

you need to consider:

1. finding a custodian who will accept mimimal amounts such as $300 yr and how much would be charged for admin fees. Most custodians have minimum amounts for opening an IRA.t

2. what are the requirements for opening an IRA for a minor.

3. paying any ancillary taxes such as state income tax and FICA/SECA tax that may apply.

Most parent do not want to bother with all of the above complexities.

[John G]

You have struck on a good idea to consider.

Last time I looked, Etrade didn't want the under 18 Roth business. Schwab said "no problem". You will get different answers from different custodians. Apparently some brokerages have problems with a Roth also being a custodial account.

I opened Roths for my daughters based upon newspaper routes - their first jobs. Those accounts are doing very well almost 10 years later. They have a cluster of mutual funds and are getting their first lessons about investing... which is probably worth more in the long run than the initial assets.

Bear in mind, there may be some impact on college financial aide applications - but that's eight years from now and who knows what rules will apply at that time. You also have the often overstated "rogue kid turning 18 problem", which if you are doing a good job as a parent is a low probability.

A low initial balance will be another hurtle. Try each of these ways to get around the problem: (1) some mutual funds are eager for Roth business and will accept lower initial deposits for these accounts, (2) if you get email notification and statements (which saves a lot of postage) you may have fees or minimums waived, (3) if you set up a systematic monthly deposit plan, initial deposits amounts are often waived, (4) just ask for the custodian to waive the minimum... some will, especially if you have other business with them and (5) wait until next January and make an initial deposit to cover both this year and the next (even before the income is "earned").

You are in the ball park on the 700K, but that understates what you child may achieve if once they have a full time job they max out the 4000 or higher amount each year. For example, 4K a year for 40 years could build about 2 million... and if you daughter marries someone who gets off to an early start you can make that 4 million. That's a lot of future potatoes even after you factor in inflation.

PS: I expect that SS in some format will be around for many decades, but I just would not count on it as a primary source of income in retirement. Ditto on most pensions, unless they are portable. Folks just change jobs, re-educate, and switch fields too many times. My dad worked for AT&T for 44 years, I don't know too many people that follow that path anymore.

[Guest Fred Bee]

Not a Roth IRA, but how much would $700,000 in life insurance cost? Nondeductible contributions like Roth. Also, nontaxable death benefits, like Roth. It would pay off when good ole Dad checks out!

[John G]

Fred Bee, I understand the concept, but you have offered a supposed alternative that is devoid of details.

Frankly, I am not encouraging you to provide details if it comes across like an advertisement for insurance... which is when my role as a moderator would be activated. Also, if you choose to post on this topic again, I suggest that you mention any ties to the insurance industry.

Part of the problem is that this is an apples to woodchips comparison. These two "alternatives" defy an easy comparison.

Let me highlight some of the issues.

> There are real overheads with insurance, and everyone can't be a winner compared to minimal overheads with building a Roth and almost all are "winners" with prudent investments and the passage of time. Both involve investments but you don't have any control over how an insurance company invest vs potential complete control over a Roth. I'm not interesting in an argument of which is better, just pointing out a huge difference.

> The father would also have to continue to have sufficient funds to pay ever increasing premium payments which might present a problem to someone in retirement. If the father in his late years forgets to make a premium payment.... these don't map over to a Roth.

> If you stop the "plan" you end up with zip with insurance (I make the assumption that only term could be remotely affordable), but if you stop contributing to a Roth you still have the beginnings of a nest egg intact.

> You can have trouble finding any insurance policy because of medical history (my wife's short, one time bout with carpel tunnel when she was pregnant 25 years ago was excluded from coverage my an insurance company last year).

> The 700k in your example is not tax sheltered once it gets turned over to the child while the Roth would continue in the shelter and could potentially pass on to the next generation... and the 700K could easily be a much higher number.

> The child would not normally be able to tap into the insurance policy (such as for first time home purchase or education) while she could access the Roth.

> Unless you have connections in the mob, you can't readily set the dates for the 700k to kick in. Of course, the insurance option could payoff early - an option you don't get with a Roth that requires decades to build.

> Then we have the problem of potential default by the insurance company... a local attorney that I know used to accept a single policy as part of a setttlement - he doesn't anymore because of the non-trivial risk of the insurer defaulting.

Insurance has a valid place in our society, but let's not pass it off as anything remotely like a miracle product or sure thing. (Roths aren't a perfect product or sure thing either.)

Presenting a minimally explained idea with zero data provides little service to folks who come to this message board looking for information.

[Guest Fred Bee]

I work for an insurance company. Let me know if you need a biography or something.

[John G]

Fred, no biography needed, but readers should have some sense of the authors background. I just added some material to update and expand my profile. While the era of identity theft, suggests that you don't provide too much material, perhaps our major contributors should provide more background about themselves. (Hint, hint!)

Can you provide expand on your original comment and give an example of the arrangements, requirements, parameters and costs? Please make it generic and not recommending a specific company. Strive to be factual rather than promotional... "fair and balanced" seems to be the catch phrase this decade which here means you try to summarize the benefits AND the negatives.

In the past, we have had some "miracle cure" type posts (medical and investment) that we have had to screen out. Insurance is another tool that can address some problems and because this site is aimed at retirement plans, it rarely gets mentioned.