The what? I have a confession – I made it up. Actually, “Kiddie Roth” turns up a few Google hits, so maybe I wasn’t even first. But let me get to the point, why a Kiddie Roth? And why now?
I’ll answer the second question first. Jane 2.0 (my 11 year old) had taken the initiative to send out letters of introduction in June to a few local families. She described her prior experience taking care of younger children, and told of her interest in positions available for babysitting/mother’s help. I sure admired her initiative and was glad when she heard back from some moms. This got me thinking, of course. J2 now has earned income.
If you are a regular reader, you’re aware that I have mixed feelings about the Roth IRA. More so for the mistake I believe is made when making large conversions from the traditional IRA. At least the damage is minimal on an annual deposit, if in hindsight, the traditional would have been better, we’re talking a few hundred dollars in extra taxes, not tens or hundreds of thousands. On the other hand, there are times the Roth is a great idea, and this is one of those times.
A dependent minor still gets her own standard deduction for earned income, $5,700 for 2009 & 2010. Since we are talking about only $1500 or so earned this summer, there’s no point in looking at a traditional IRA, but a Roth is ideal. This money will grow tax free until she taps it for retirement. At 8%, over 50 years this money can grow to $70K, at 10%, $176K. I recall an example of early savings from years ago, comparing a 21 year old who makes 5 years of deposits and stops. Someone else starts making the same size deposits at 26, and never catches up. In other words, you can have twice the lifetime return by starting 5 years early. This made me thing how much better a head start I can give my daughter by starting her Roth now.
When I began to discuss this topic, two points came up. No, J2 isn’t going to put this money into the Roth. I plan to give her money that she got got when she was younger and put aside for her. So long as she has earned income, the individual dollars don’t need to be traced to the Roth. Not all brokers allow IRAs for minors. I use Schwab, and they offer an account specifically designated as a Custodial IRA.
When I read articles such as How Much Do You Need To Retire? The 10% Rule, I’m reminded it’s never too early to get started.
What do you think? Is a Roth in your child’s future?