Roth IRA for child

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Topic Author
NDG
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Roth IRA for child

Post by NDG » Thu Dec 20, 2018 4:24 pm

My 8 year old is interested in investing some of his money. He sold mistletoe and has $100 he wants to use. He has heard my wife and I talking about saving, index funds, the stock market, etc. so he was excited that he has some money now. I didn't want to discourage him and shoot his idea down. I was wondering if anyone has experience with this and hear your thoughts. I thought about just telling him not worry about investing it and open a bank account for him. I also thought about putting it in a taxable account in my name, but have it earmarked as his money, because I didn't want him to have financial aid issues when he gets to college age if he had money invested in his own name. That may be unethical of me to do. Any advice would be appreciated.
Last edited by NDG on Wed Jan 30, 2019 2:03 am, edited 1 time in total.

RobLyons
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Re: 8 year old investing help

Post by RobLyons » Thu Dec 20, 2018 4:41 pm

My kid's elementary school has teamed up with a local bank and they have banking day; day for kids to bring in any amount of money in a banking envelope, and deposit it at school with a banking representative. It's a good way to get them thinking about saving. If this isn't offered at your child's school of course you can go with him/her to your local bank and open a savings account. At the same time I have mentioned to them that there are better ways to invest, just to get them to start thinking about compounded interest.
Our next step may be placing their money into a CD and watching it grow. Slow and steady.
Just my $0.02 :D
"Great parenting sets the foundation for a better world"

Housedoc
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Re: 8 year old investing help

Post by Housedoc » Thu Dec 20, 2018 4:43 pm

If you can swing it, give him a gift from your securities to meet the account minimum at one of the big 3 institutions mentioned here often. My sons have been following my Deferred Gratification plan and have built a nice emergency funds and over 50K in a brokerage accounts. They are in their mid 20's and are firm believers. Roth 401K fans also so when he makes more money, open a Roth for him!

chevca
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Re: 8 year old investing help

Post by chevca » Thu Dec 20, 2018 4:45 pm

It's good the kid is interested in investing. But, at 8 years old I would question if they're emotionally developed enough to handle ups and downs of the market. Could they really handle losing 10% or 25% of their savings?

I would just go with teaching about compound interest at this point. Open a savings account for them and teach them how it grows on it's own... and adding more in there helps along the way.

My credit union has some special savings accounts for kids that give a pretty good APY. Check something like that out.

k3vb0t
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Re: 8 year old investing help

Post by k3vb0t » Thu Dec 20, 2018 5:03 pm

chevca wrote:
Thu Dec 20, 2018 4:45 pm
I would just go with teaching about compound interest at this point. Open a savings account for them and teach them how it grows on it's own... and adding more in there helps along the way.
That was my thought as well. I'd start with compound interest and the magic of delayed gratification -- hey, your money made more money and you didn't have to do anything! -- and at a later date move into picking a single stock of a company he likes (to educate on why companies are even on the stock market, etc.), then onto bigger and better things like index investing.

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dratkinson
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Re: 8 year old investing help

Post by dratkinson » Thu Dec 20, 2018 6:12 pm

I would help him open the account and invest.

I don't know how to do it, but since there is a book, How a Second Grader Beats Wall Street, it must be possible to do.

You'll need a low-cost brokerage, low-fund minimums, and a taxable account. Search forum.

Maybe start here.
"Brokerage account for kids": viewtopic.php?t=145977

Or, better, read above book.



Can start by taking him to your public library to get the book. Then read it together. And help him come up with an investing plan. Have him write his plan in the form of an IPS (Investment Policy Statement).

You'll need to point out all of the references in the book where the author cautions about market volatility and show junior how much his investment account can lose in value... on paper. And remind him that he must accept the market volatility to get the market return. He must stay the course to win the race.

Have him write the information about market volatility into his IPS, and what he will do when it happens. Why? So you can refer him to it later when the market troubles his emotions.



This should be a fun project.

Please keep us updated, as I'm sure others will want to know what you (plural) did, and junior's reactions and outcome. :)

Best of luck.



Welcome to the forum, Junior.
Last edited by dratkinson on Thu Dec 20, 2018 6:24 pm, edited 2 times in total.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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Alexa9
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Re: 8 year old investing help

Post by Alexa9 » Thu Dec 20, 2018 6:18 pm

An easy way is to do a college savings account. You can open a Coverdell at TDA and buy VTI. If it is legitimate earned income he can also do a Roth IRA. Just keep good records.

retire2022
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Re: 8 year old investing help

Post by retire2022 » Thu Dec 20, 2018 6:23 pm

NDG wrote:
Thu Dec 20, 2018 4:24 pm
My 8 year old is interested in investing some of his money. He sold mistletoe and has $100 he wants to use. He has heard my wife and I talking about saving, index funds, the stock market, etc. so he was excited that he has some money now. I didn't want to discourage him and shoot his idea down. I was wondering if anyone has experience with this and hear your thoughts. I thought about just telling him not worry about investing it and open a bank account for him. I also thought about putting it in a taxable account in my name, but have it earmarked as his money, because I didn't want him to have financial aid issues when he gets to college age if he had money invested in his own name. That may be unethical of me to do. Any advice would be appreciated.
If your child could get a part-time job he could open an Roth IRA and in 59 years it could be worth a considerable sum

http://www.moneychimp.com/calculator/co ... ulator.htm

$1000 at 59 years at 7%= 812,520.38

Fidelity has a program for Roths for Kids, unfortunately, I did not find a program from Vanguard for kids

https://www.fidelity.com/retirement-ira/roth-ira-kids

Teague
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Re: 8 year old investing help

Post by Teague » Thu Dec 20, 2018 6:33 pm

chevca wrote:
Thu Dec 20, 2018 4:45 pm
It's good the kid is interested in investing. But, at 8 years old I would question if they're emotionally developed enough to handle ups and downs of the market. Could they really handle losing 10% or 25% of their savings?
Well, he's got his basic needs (and I presume quite a bit more) covered for at least the next ten years, so there's that.

I'd just make sure he knows that the value in his account will sometimes go down, but over time it should go up. That's without having to do anything, and that's pretty neat. And make sure he understands that he has to leave it in there a couple of years at least, preferably longer.

When I was ten years old, about a half century ago, I earned $100 one summer selling oranges from the trees in our back yard. Ten cents a pound. I thought it was so flippin' cool to have $100 at that age that I had no desire to spend it and wind up with less. After all, I was rich and I wanted to keep it that way!

And when my folks would occasionally need some cash for groceries or whatever, they would sometimes borrow twenty or forty dollars from me, because that was easier than cashing a check at the bank. No ATMs back then of course. Having adults borrowing money from me at that age was quite empowering.
Semper Augustus

zeppy
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Re: 8 year old investing help

Post by zeppy » Thu Dec 20, 2018 7:06 pm

This was my experience with helping my granddaughter appreciate the value of saving:

When my granddaughter was a little girl and came to visit me, I would frequently let her perform "for-pay" chores around the house. She might earn 25, 50 cents and the deal was that she had to put half of what she earned into a savings account at the bank. We made a big deal of it, driving to the bank, she with money and bank passbook in hand, handing it to the teller (I'm sure the bank teller was less than pleased with these little deposits) who dutifully posted the amount and handed the passbook back to her. She felt quite important doing this and afterwards, we would go somewhere where she could buy something of her own choosing with the other half of her earnings. It was a fun experience for her.

After a couple of years, the savings account had grown close to $100. I told her that when it reached $100, I would help her purchase a part of a company and gave her several to choose from - CocaCola, McDonalds, Toys-R-Us - companies she was familiar with. She chose Coca Cola so when she reached $100, she/we went to the bank and withdrew the money, took it to a (prearranged) meeting with a local broker, who helped make a big event of buying her first share of Coke stock for $96.38 (with me as custodian under Unif.Trans.Minor Act). She also started collecting Coke memorabilia and enjoyed joking about seeing "her" trucks and "her" employees out there delivering Coke. Again, this was a fun learning experience for her.

Thru the years, various family members would contribute to the account at birthdays, Christmas, etc. My granddaughter also contributed fairly regularly as she earned baby-sitting money, etc.

When she was 17-18, she got a part time job at Penny's. This was "earned income" and enabled her to open a ROTH IRA so we/she sold the Coke stock and opened a ROTH IRA (Vanguard mutual fund) with the money. Since that time - thru college, marriage, 2 babies and divorce - she has not contributed a whole lot to this fund but at least it is in place and growing and she and others can "feed" it a little as the spirit moves them.

I think she enjoyed these various money-saving ventures and hopefully, they have encouraged her to treat her money with care

6Pack
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Re: 8 year old investing help

Post by 6Pack » Thu Dec 20, 2018 7:16 pm

I told my 7 year old that if he saves $100, I will give him a $100 bill. This has given him a good goal to work toward and make a decision between buying something now or having more money later. So far, he’s saved all of his allowance and tells me every week how I’m going to have to give him $100.

Granted, he has a lot at Vanguard he has no idea about (Roth IRA, taxable account and 529), but I want him to learn early about saving and deciding between wants and needs.

Topic Author
NDG
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Re: 8 year old investing help

Post by NDG » Fri Dec 21, 2018 12:39 am

Thanks for the input! I am reading your responses to my son and he's working on his decision. He says he understands the risk he'd take with the market, but we are also looking into to some of the other lower risk, lower return ideas, as well as coverdell/529 plans that you all have shared. dratkinson I will look into the book and post you shared. retire2022 thanks for the info about the Fidelity account.

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NDG
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Re: 8 year old investing help

Post by NDG » Fri Dec 21, 2018 1:12 am

Alexa9 thanks for the info on the coverdell account through TDA. I looked into that today. You said keep good records if we do a Roth. What did you mean by that? Records of him making money selling mistletoe, or of his investing?

KingRiggs
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Re: 8 year old investing help

Post by KingRiggs » Fri Dec 21, 2018 8:55 am

zeppy wrote:
Thu Dec 20, 2018 7:06 pm
This was my experience with helping my granddaughter appreciate the value of saving:

When my granddaughter was a little girl and came to visit me, I would frequently let her perform "for-pay" chores around the house. She might earn 25, 50 cents and the deal was that she had to put half of what she earned into a savings account at the bank. We made a big deal of it, driving to the bank, she with money and bank passbook in hand, handing it to the teller (I'm sure the bank teller was less than pleased with these little deposits) who dutifully posted the amount and handed the passbook back to her. She felt quite important doing this and afterwards, we would go somewhere where she could buy something of her own choosing with the other half of her earnings. It was a fun experience for her.

After a couple of years, the savings account had grown close to $100. I told her that when it reached $100, I would help her purchase a part of a company and gave her several to choose from - CocaCola, McDonalds, Toys-R-Us - companies she was familiar with. She chose Coca Cola so when she reached $100, she/we went to the bank and withdrew the money, took it to a (prearranged) meeting with a local broker, who helped make a big event of buying her first share of Coke stock for $96.38 (with me as custodian under Unif.Trans.Minor Act). She also started collecting Coke memorabilia and enjoyed joking about seeing "her" trucks and "her" employees out there delivering Coke. Again, this was a fun learning experience for her.

Thru the years, various family members would contribute to the account at birthdays, Christmas, etc. My granddaughter also contributed fairly regularly as she earned baby-sitting money, etc.

When she was 17-18, she got a part time job at Penny's. This was "earned income" and enabled her to open a ROTH IRA so we/she sold the Coke stock and opened a ROTH IRA (Vanguard mutual fund) with the money. Since that time - thru college, marriage, 2 babies and divorce - she has not contributed a whole lot to this fund but at least it is in place and growing and she and others can "feed" it a little as the spirit moves them.

I think she enjoyed these various money-saving ventures and hopefully, they have encouraged her to treat her money with care
Curious what the Coke stock sold for...

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dratkinson
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Re: 8 year old investing help

Post by dratkinson » Fri Dec 21, 2018 4:26 pm

NDG wrote:
Fri Dec 21, 2018 12:39 am
... retire2022 thanks for the info about the Fidelity account.
If junior does not have "earned income" then he would need to use a taxable account, not an Individual Retirement Account (IRA). Why? Junior, only "earned income"---income paid to you by an employer, or earned by you as self-employed/reported/taxed income---can go into an IRA.

But! junior would still get the market growth in a taxable account... it would just be taxed annually. And on such a small amount the tax would also be small. And since Qualified Dividend Income (QDI: income previously taxed at the corporate tax rate before being sent to us)---the largest part of investment return of Total Stock Market and Total International Stock Market index funds---is taxed at 0% in a low tax bracket (assumed for junior), then it's almost tax-free investment growth.

I don't know how a child's investment earnings are taxed. (Are they taxed separately at his assumed low tax rate? Are they included with and taxed at the parent's tax rate? I don't know.) But I would hope that the book (How a Second Grader Beats Wall Street) would explain this and tell you (plural) how to ensure the annual tax is reported and paid.

So this project is still doable, even if you (plural) must use a taxable account. Junior may just need to learn how to do his taxes earlier than expected, for himself. Or learn how to double-check that his parents include his earnings in the family tax return. :)
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

retire2022
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Re: 8 year old investing help

Post by retire2022 » Fri Dec 21, 2018 6:46 pm

NDG wrote:
Fri Dec 21, 2018 12:39 am
Thanks for the input! retire2022 thanks for the info about the Fidelity account.
NDG you're very welcomed...

If you can save $14 a day it can turn into a million, you may have to sign up to morningstar in order to read article:

https://www.morningstar.com/articles/88 ... r-day.html

see Lazy portfolio for your child:

https://www.bogleheads.org/wiki/Lazy_portfolios

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Watty
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Re: 8 year old investing help

Post by Watty » Fri Dec 21, 2018 10:21 pm

There are all sorts of ways this could backfire since he could invest the money and have it do badely and get turned off of investing for life. It could be just as bad if he picks out some stock and it does wonderfully and gets the mindset of making "bets" in the stock market casino.

It is a shame that they don't sell paper savings bonds anymore since that would be an alternative. Dealing with treasury direct with an online account to buy savings bonds would be an option but they would be pretty hard to deal with and account for a minor.

An alternative would be to have him pick out some goal to buy something like a new computer that he could buy with his savings.

retire2022
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Re: 8 year old investing help

Post by retire2022 » Sat Dec 22, 2018 12:23 pm

Watty wrote:
Fri Dec 21, 2018 10:21 pm
There are all sorts of ways this could backfire since he could invest the money and have it do badely and get turned off of investing for life. It could be just as bad if he picks out some stock and it does wonderfully and gets the mindset of making "bets" in the stock market casino.

It is a shame that they don't sell paper savings bonds anymore since that would be an alternative. Dealing with treasury direct with an online account to buy savings bonds would be an option but they would be pretty hard to deal with and account for a minor.

An alternative would be to have him pick out some goal to buy something like a new computer that he could buy with his savings.
Watty if the op's son invest in a target fund, I don't see how that can go bady, unless there will be high inflation, then bonds could be a better choice.

GuineaPig
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Re: 8 year old investing help

Post by GuineaPig » Sat Dec 22, 2018 1:11 pm

I have a 9-year-old and 6-year-old. Personally, I don't think my kids should be investing in equities at this point. That feels way too advanced. Instead, a standard savings account would make more sense.

Here's the thing though: I don't want to manage yet another account (and yes, the account would have to be joint, with you and your child's names on it). I need to keep my life fairly simple. And, I learned this the hard way: my older son had a savings account since birth and had a couple of hundred dollars in it. He's earned approximately 12 cents per year in interest -- totally not worth the hassle.

We closed the account last week. Instead, I' just set up the Google sheet I found here to make my own "Bank of GuineaPig" (there's a good intro to it in the forum post): https://forum.mrmoneymustache.com/mini- ... out-money/

I am the banker: I promise to guarantee all money in there. It makes it very easy to "deposit" allowance into it each week. I also can manually add interest when I feel it is appropriate (I'm going to make a 1% interest payment each month). I have shared a read-only link to his Google account so that he can view his balance at any time. When he wants to buy something, he can either ask for cash or I can itemize the expense in the account (to "refund" me the cost). And I actually made two tabs -- one tab is for my older son and one for my younger son.

I feel like this does a much better job of teaching my son about money, savings, interest, and expenses than his old, real-world bank account. Plus, he gets to be much more involved in it (since he can view it at any time). He is very excited about earning interest!

There are apps and websites that also do this, rather than using the Google sheet. However, I found the spreadsheet simpler and easier to share with my son. Plus, I didn't want to worry about those apps or websites disappearing.

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RickBoglehead
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Re: 8 year old investing help

Post by RickBoglehead » Sat Dec 22, 2018 1:13 pm

Agree 100%.

We did a "Bank of Dad". I tracked their balance in Quicken.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

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Watty
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Re: 8 year old investing help

Post by Watty » Sat Dec 22, 2018 1:48 pm

retire2022 wrote:
Sat Dec 22, 2018 12:23 pm
Watty if the op's son invest in a target fund, I don't see how that can go bady, unless there will be high inflation, then bonds could be a better choice.
The money would likely be used for something like college, buying a first car, or something like that so target date fund would be using an investing horizon that is too far in the future and be almost all stocks if it was something like a 2080 target date fund. For an 8 year old having their $100 reduced to $75 could be pretty scary.

Even if you used a 2020 target date fund that would be assuming that you would be spending the money over a 30 year retirement and it might be too aggressive.

retire2022
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Re: 8 year old investing help

Post by retire2022 » Sat Dec 22, 2018 2:58 pm

Watty wrote:
Sat Dec 22, 2018 1:48 pm
retire2022 wrote:
Sat Dec 22, 2018 12:23 pm
Watty if the op's son invest in a target fund, I don't see how that can go bady, unless there will be high inflation, then bonds could be a better choice.
The money would likely be used for something like college, buying a first car, or something like that so target date fund would be using an investing horizon that is too far in the future and be almost all stocks if it was something like a 2080 target date fund. For an 8 year old having their $100 reduced to $75 could be pretty scary.

Even if you used a 2020 target date fund that would be assuming that you would be spending the money over a 30 year retirement and it might be too aggressive.
There are 2065 target funds out there, aggressive got nothing to loose, albeit I agree stock market is too complicated even for adults, but I beg to differ it he was my child I would do equities.

elainet7
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Re: 8 year old investing help

Post by elainet7 » Sat Dec 22, 2018 4:10 pm

Give him a legitimate job shortly and invest all in a ROTH IRA!!

Topic Author
NDG
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Re: 8 year old investing help

Post by NDG » Tue Jan 08, 2019 4:15 am

Thanks to everyone for the feedback. It's been a fun process to talk through with my son. Here's what we ended up doing...
My son ended up making $202 from his mistletoe sales. We also gave him some birthday $ from family members over the years that we had been holding for him. He had a total of $660. We went to our credit union to open an account. He was so proud telling the banker how to spell his name, signing his name, telling her what his birthdate was, etc. He put $360 into a "college saving" account at our credit union. The money is still completely liquid, and he earns 2.05%. He put $98 into a savings account. We opened a Roth IRA for kids through Fidelity. It has no minimum and no fees. We funded his Roth with his $202 from his mistletoe sales. We put it in Fidelity's total market fund (FSKAX). Our tax lady said she will do his tax return for free and he won't pay any taxes on $202. I look forward to seeing how he responds to watching his money over the months and years ahead. Thanks again for all the ideas!

lakpr
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Re: 8 year old investing help

Post by lakpr » Tue Jan 08, 2019 6:15 am

DCU offers 6.17% on the first $1000 in a savings account. I am doing this for my two kids. Almost stock market like return, for very little risk

latesaver
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Re: 8 year old investing help

Post by latesaver » Tue Jan 08, 2019 9:57 am

zeppy wrote:
Thu Dec 20, 2018 7:06 pm

After a couple of years, the savings account had grown close to $100. I told her that when it reached $100, I would help her purchase a part of a company and gave her several to choose from - CocaCola, McDonalds, Toys-R-Us - companies she was familiar with. She chose Coca Cola s
She chose...wisely.

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dratkinson
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Re: 8 year old investing help

Post by dratkinson » Tue Jan 08, 2019 2:15 pm

NDG wrote:
Tue Jan 08, 2019 4:15 am
Thanks to everyone for the feedback. It's been a fun process to talk through with my son. Here's what we ended up doing...
My son ended up making $202 from his mistletoe sales. We also gave him some birthday $ from family members over the years that we had been holding for him. He had a total of $660. We went to our credit union to open an account. He was so proud telling the banker how to spell his name, signing his name, telling her what his birthdate was, etc. He put $360 into a "college saving" account at our credit union. The money is still completely liquid, and he earns 2.05%. He put $98 into a savings account. We opened a Roth IRA for kids through Fidelity. It has no minimum and no fees. We funded his Roth with his $202 from his mistletoe sales. We put it in Fidelity's total market fund (FSKAX). Our tax lady said she will do his tax return for free and he won't pay any taxes on $202. I look forward to seeing how he responds to watching his money over the months and years ahead. Thanks again for all the ideas!
I'm assuming this is the magic step that will change junior's work into “self-employment earned income”, and so qualifies him for an IRA. Correct?

Good on ya, tax lady.


You (plural) might want to review his tax return and learn this magic for yourselves. Why? In future years junior may want to do his own tax returns. Why? I believe this is required knowledge to become an entrepreneur. Of course, when his business becomes large enough, he will be too busy working and making money, so will need to hire his own tax expert. :)


Junior's money to invest:
$458, birthday money (saved from prior years).
$202, business income.
$660, total to invest.

Invested in:
$202, Fidelity Roth IRA (for kids).
$360, Credit Union, college savings account.
$ 98, Credit Union, ordinary saving account.
$660, total invested.

It looks like you have covered everything. Good job, junior and dad.



Thanks for the follow-up. I was curious what junior decided to do.

Did you open the Fidelity IRA account online, or did you walk into an office? I’m assuming “online” since you did not mention junior needing to tell a Fidelity representative how to fill out the paperwork.

Is junior's Fidelity IRA account linked to his CU account? Is this how he will make future IRA contributions---walk into CU, deposit IRA contribution, then have Fidelity pull it from CU account?
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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RickBoglehead
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Re: 8 year old investing help

Post by RickBoglehead » Tue Jan 08, 2019 2:27 pm

RickBoglehead wrote:
Sat Dec 22, 2018 1:13 pm
Agree 100%.

We did a "Bank of Dad". I tracked their balance in Quicken.
This ^^^ But it's called the "Dad Bank", not the "Bank of Dad". Perhaps yours was a lesser known affiliate? :wink:

5% interest, compounded annually. Done.

I did this until my kids were in their mid-teens as I recall.

There is no way an 8 year old has a clue about the stock market.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.

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F150HD
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Re: 8 year old investing help

Post by F150HD » Tue Jan 08, 2019 2:30 pm

RobLyons wrote:
Thu Dec 20, 2018 4:41 pm
My kid's elementary school has teamed up with a local bank and they have banking day; day for kids to bring in any amount of money in a banking envelope, and deposit it at school with a banking representative. It's a good way to get them thinking about saving. If this isn't offered at your child's school of course you can go with him/her to your local bank and open a savings account. At the same time I have mentioned to them that there are better ways to invest, just to get them to start thinking about compounded interest.
Our next step may be placing their money into a CD and watching it grow. Slow and steady.
Just my $0.02 :D
I get the idea of that and I'm sure its well intentioned, but it sounds like marketing to kids from a bank. Doesn't sound ethical to me. The bank does earn $$ off the deposits and potentially future business (loans of any and every kind).

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F150HD
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Re: 8 year old investing help

Post by F150HD » Tue Jan 08, 2019 2:30 pm

double post

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RickBoglehead
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Re: 8 year old investing help

Post by RickBoglehead » Tue Jan 08, 2019 2:32 pm

F150HD wrote:
Tue Jan 08, 2019 2:30 pm
I get the idea of that and I'm sure its well intentioned, but it sounds like marketing to kids from a bank. Doesn't sound ethical to me. The bank does earn $$ off the deposits and potentially future business (loans of any and every kind).
Not ethical? Really?

I could make a list of 20 companies that market to kids, with the intent of capturing a buyer for life. Are those all not ethical also?

We had this when I was in elementary school nearly 50 years ago. It was called "Banking Day". We had passbooks, they stamped them, and we brought them home. Paltry interest rate, but the kids learned about banking.

Just remembered that Pizza Hut has a program to support reading. Kids cashed in for pizza with the family. Very nefarious plot to convert all kids to Pizza Hut customers. 14 million kids have participated.
Last edited by RickBoglehead on Fri Jan 11, 2019 1:51 pm, edited 1 time in total.
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yousha
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Re: 8 year old investing help

Post by yousha » Tue Jan 08, 2019 2:37 pm

Is it possible for my granddaughter age 9 to open a Roth IRA with the money she earns at her Dad's medical practice doing clerical chores.

GAAP
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Re: 8 year old investing help

Post by GAAP » Tue Jan 08, 2019 2:39 pm

Take a look at http://irakids.com/ (not a secure site. Lots of good ideas there.
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niceguy7376
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Re: 8 year old investing help

Post by niceguy7376 » Tue Jan 08, 2019 2:46 pm

We opened Bofa accounts on kids name (ATM card on their name) with me as secondary (can see their accounts in my login) and deposited the money.
Once the amount reached $200 (periodic gift card deposits), they started earning a penny as interest.

Bofa "Museums on us" allows them free access (as they have ATM cards on their name).

mptness
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Re: 8 year old investing help

Post by mptness » Tue Jan 08, 2019 3:17 pm

NDG wrote:
Tue Jan 08, 2019 4:15 am
Our tax lady said she will do his tax return for free and he won't pay any taxes on $202.
It is my understanding that there is no requirement to file for 2018 until self-employment income exceeds $400. Provided that this is his only income can't he simply retain the income and expense records for his mistletoe business as proof of the income or is there some other rule about Roth IRAs that I am not aware of?

RobLyons
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Re: 8 year old investing help

Post by RobLyons » Thu Jan 10, 2019 5:34 am

lakpr wrote:
Tue Jan 08, 2019 6:15 am
DCU offers 6.17% on the first $1000 in a savings account. I am doing this for my two kids. Almost stock market like return, for very little risk

Great find! Using this for my kids, thank you!
"Great parenting sets the foundation for a better world"

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dratkinson
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Re: 8 year old investing help

Post by dratkinson » Thu Jan 10, 2019 6:50 pm

GAAP wrote:
Tue Jan 08, 2019 2:39 pm
Take a look at http://irakids.com/ (not a secure site. Lots of good ideas there.
Most interesting!

The magic happens when the tax forms are completed to document the child's self-employment earned income (babysitting, lawn mowing, lemonade stand,...). This is what authorizes the child's Roth IRA contribution.

So I especially liked the completed sample federal tax forms. They look simple enough to complete. (The samples are several years old, but the process should be simple enough to replicate with current tax forms.)

But it's left to the reader to extend the logic to complete any state tax forms. But that should be easy enough to figure out.

So the simple action steps* required for a child to contribute to a Roth IRA are: the child, with adult help...
--Earns money from part-time work and keeps good records.
--Opens a free, zero-balance savings account at a local B&M bank/CU.
--Opens a zero-balance "Fidelity Roth IRA for Kids" account, and links it to child's bank/CU savings.
--Periodically transfers earned income from savings to Fidelity Roth IRA.
--Completes/files required annual tax returns.

(* I think that's all the steps.)



This has been an informative topic. Will try to remember it, to refer others to it, so they don't need to reinvent this wheel.


OP. Since you've come up with a good solution that could benefit others, it might help if you renamed this topic to be something more descriptive so it's easier to find when searching the forum. Maybe something like "Roth IRA for child",....
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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NDG
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Re: 8 year old investing help

Post by NDG » Wed Jan 30, 2019 2:02 am

dratkinson, yes we used Fidelity online and tied it to our CU for future investments. I'll try to figure out how to rename the original post.

mptness, maybe you're right about him not needing to file taxes with the low income. I'll find out from our tax lady. Maybe that's why she said it's free...nothing for her to do.

lakpr, thanks for the info on the savings account.

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dratkinson
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Re: 8 year old investing help

Post by dratkinson » Wed Jan 30, 2019 4:28 am

NDG wrote:
Wed Jan 30, 2019 2:02 am
dratkinson, yes we used Fidelity online and tied it to our CU for future investments. I'll try to figure out how to rename the original post.

To rename the OP (original post, original poster), click on the Edit button in your OP. Then edit the topic title.

mptness, maybe you're right about him not needing to file taxes with the low income. I'll find out from our tax lady. Maybe that's why she said it's free...nothing for her to do.

lakpr, thanks for the info on the savings account.
Is your tax lady certain you can contribute to a child's rIRA without filing the tax forms to document the self-employment income and rIRA contribution? I ask because...
--Fidelity will document the rIRA contribution to the IRS (form 5498?).
--So shouldn't the IRS expect a tax return, documenting the self-employment income which authorizes the rIRA contribution, to match against the Fidelity form? So wouldn't the absence of a matching tax return "red flag" the rIRA contribution?
--Can your tax lady provide you with the (chapter and verse) IRS regulation, that says it's okay to have a rIRA contribution without a corresponding tax return, if the contribution is below a certain limit?

See: http://www.google.com/search?q=irs+form ... ntribution


GAAP wrote:
Tue Jan 08, 2019 2:39 pm
Take a look at http://irakids.com/ (not a secure site. Lots of good ideas there.
I ask because above link shows sample (old) tax forms submitted to document a child's self-employment income and rIRA contribution.



Edit. Clarity.
Last edited by dratkinson on Thu Jan 31, 2019 1:11 am, edited 1 time in total.
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chipperd
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Re: Roth IRA for child

Post by chipperd » Wed Jan 30, 2019 5:19 am

Good on ya!
Couple thoughts having just gone through the college application/acceptance process for my two oldest over the last two years.
I don't consider it unethical to learn the rules of the college funding game. Why pay more for the same service? . I view it akin to knowing tax law and how to minimize your tax payments. Others on this forum clearly do not, as I have learned over the last few years. Also, not all colleges figure what they should charge you/your son using the same methods and/or formulas, so YMMV.
Given my family's financial situation, I actually decided to cut back on work, once I realized working a 5th day per week yielded me only $80 net after college costs. It's worth exploring.
As of now (could change in 10 years):
Colleges don't "count" funds in retirement accounts such as a Roth as funds available to pay for college, but they will heavily "count" funds in a non-retirement fund as monies available to pay for college (about 30% of your child's funds will be considered available by an institution that uses the CSS profile method to determine your child's costs to attend that school).
PM me for specifics if you like.
Happy investing!

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Re: 8 year old investing help

Post by happymob » Wed Jan 30, 2019 8:01 am

chevca wrote:
Thu Dec 20, 2018 4:45 pm
It's good the kid is interested in investing. But, at 8 years old I would question if they're emotionally developed enough to handle ups and downs of the market. Could they really handle losing 10% or 25% of their savings?
But learning that indexes could go down, but they will (likely - there is still the Nikkei DOW counterexample) eventually come back is an important lessen to learn before large money is involved. It's brutal to hear stories of people who moved from equities into bonds in early 2009.

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Re: 8 year old investing help

Post by chevca » Wed Jan 30, 2019 11:01 am

happymob wrote:
Wed Jan 30, 2019 8:01 am
chevca wrote:
Thu Dec 20, 2018 4:45 pm
It's good the kid is interested in investing. But, at 8 years old I would question if they're emotionally developed enough to handle ups and downs of the market. Could they really handle losing 10% or 25% of their savings?
But learning that indexes could go down, but they will (likely - there is still the Nikkei DOW counterexample) eventually come back is an important lessen to learn before large money is involved. It's brutal to hear stories of people who moved from equities into bonds in early 2009.
Again, the kid is 8....

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Re: 8 year old investing help

Post by Spirit Rider » Wed Jan 30, 2019 9:27 pm

yousha wrote:
Tue Jan 08, 2019 2:37 pm
Is it possible for my granddaughter age 9 to open a Roth IRA with the money she earns at her Dad's medical practice doing clerical chores.
First, banish the term "chores" from the discussion. A child can not generally be paid compensation for family chores.

Your granddaughter can be employed by her father's business to perform business necessary and age appropriate tasks and be paid a fair market value (FMV) wage. In her case probably minimum wage.

If the father's business is a sole proprietorship or a partnership with only mom as a partner. FICA and FUTA withholding is not required.

Wages qualify as compensation for Roth IRA contributions. There should be clear documentation of the payments. A W-2 is required if the wages are >= $600.

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NDG
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Re: Roth IRA for child

Post by NDG » Thu Jan 31, 2019 12:57 am

dratkinson, our tax lady said "His return would not be complicated and no big deal." So, I think you're right, and she will file a return for my son.

Thanks chipperd, I didn't know they only counted 30% available from kids rIRA.

happymob and chevca, it has been a fun experience for me to read and learn about finances and investing over the past 6 years, starting with no past knowledge or experience really. I have really enjoyed the journey. Then with my son seeing/hearing my wife and I walk through this, it cracked me up to hear him one day say "daddy, I want to put money in the stock market." Once he made some money selling mistletoe (which is something he's already done at Christmas for several years), I thought "what the heck" I'm going to ask the Bogleheads what they think, as you all have been sort of my investing parents. There has been good opinions expressed on both sides of the starting a rIRA for an 8-year old. But I talked it through with him (volatility, etc.) and he still wanted to do it. So he got his wish (with my approval) to "have money in the stock market." But you're right, I have no idea how it will go or how he'll respond to losing his money. Thus far, he has no idea. He hasn't even asked. Things are pretty busy with basketball practices and nerf wars for an 8-year old :D At least for now I get to be in charge of his rIRA, so if losing his money freaks him out, he has to just stand there and watch it bleed :shock: I won't let him pull it out. Maybe by the time he's 18, he'll have learned that the roller coaster eventually goes back up and all will be okay as long as he doesn't jump off.

chipperd
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Re: Roth IRA for child

Post by chipperd » Thu Jan 31, 2019 3:29 am

OP
To clarify, ira monies DO NOT count, as far as I can tell, towards a school's calculation regarding your child's individualized cost to attend that school.
It's the non-retirement assets that will count at that roughly 30% rate I mentioned.
Sorry for any confusion.

miamivice
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Re: Roth IRA for child

Post by miamivice » Sun Apr 14, 2019 12:00 pm

I know this is an older thread, but I am confused to how a 8 year old can make $200 by selling mistletoe.

I mean - I have an 8 year old. She can't go anywhere by herself. She can't purchase mistoletoe in bulk by herself. I don't think she has the skills to create a creation from the mistletoe. And I don't think strangers would buy mistletoe from her. Maybe family members?

And then, why does the kid want to put 100% of the money they made into retirement that they will not touch for 50 years? Wouldn't they want to use it to buy legos?

What I'm saying is that I read a lot here about little kids that make a ton (relative) and then the parents get excited to have them open Roth IRAs. I am not sure these are always following the intent of the tax code, which says that IRAs are for earned income. I am not sure that an 8 year old "selling" mistletoe is genuinely earned income.

Most specifically, is hobby income is considered "earned income" for the purposes of funding a Roth IRA?

Teague
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Re: Roth IRA for child

Post by Teague » Sun Apr 14, 2019 3:06 pm

miamivice wrote:
Sun Apr 14, 2019 12:00 pm
I know this is an older thread, but I am confused to how a 8 year old can make $200 by selling mistletoe.

I mean - I have an 8 year old. She can't go anywhere by herself. She can't purchase mistoletoe in bulk by herself. I don't think she has the skills to create a creation from the mistletoe. And I don't think strangers would buy mistletoe from her. Maybe family members?

And then, why does the kid want to put 100% of the money they made into retirement that they will not touch for 50 years? Wouldn't they want to use it to buy legos?

What I'm saying is that I read a lot here about little kids that make a ton (relative) and then the parents get excited to have them open Roth IRAs. I am not sure these are always following the intent of the tax code, which says that IRAs are for earned income. I am not sure that an 8 year old "selling" mistletoe is genuinely earned income.

Most specifically, is hobby income is considered "earned income" for the purposes of funding a Roth IRA?
I'm not aware of any specific IRS guidance on such things. Nor have I heard of anyone getting in trouble for interpreting these things less conservatively than others. But perhaps someone can point us to specific verified cases. Until then, I will presume I am not going to prison for the IRA I started for my child.
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dratkinson
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Re: Roth IRA for child

Post by dratkinson » Sun Apr 14, 2019 4:35 pm

I believe hanging mistletoe is a cultural holiday thing. (I remember going to get mistletoe with my father and then giving it to family for the holidays. He used his .22 squirrel rifle to shoot it out of trees. Knew of mistletoe locations from previous squirrel hunts.)

It depends upon individual kids, when they learn about money and methods of earning it for themselves. (I remember traveling in rural/residential areas and buying cokes from kids' roadside stands.)

Or maybe some parents force the kids to work to give them an early expose to earning money for themselves.

Saving for their future is just an extension of a kid earning money for himself, however it happens, whether from internal or external motivation.

As long as uncle sugar is getting tax dollars for a Roth IRA contribution and supporting tax return, I don't think he cares where the money comes from, or what motivated it.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

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Re: Roth IRA for child

Post by mariezzz » Mon Apr 15, 2019 3:06 am

Teague wrote:
Sun Apr 14, 2019 3:06 pm
miamivice wrote:
Sun Apr 14, 2019 12:00 pm
I know this is an older thread, but I am confused to how a 8 year old can make $200 by selling mistletoe.

I mean - I have an 8 year old. She can't go anywhere by herself. She can't purchase mistoletoe in bulk by herself. I don't think she has the skills to create a creation from the mistletoe. And I don't think strangers would buy mistletoe from her. Maybe family members?

And then, why does the kid want to put 100% of the money they made into retirement that they will not touch for 50 years? Wouldn't they want to use it to buy legos?

What I'm saying is that I read a lot here about little kids that make a ton (relative) and then the parents get excited to have them open Roth IRAs. I am not sure these are always following the intent of the tax code, which says that IRAs are for earned income. I am not sure that an 8 year old "selling" mistletoe is genuinely earned income.

Most specifically, is hobby income is considered "earned income" for the purposes of funding a Roth IRA?
I'm not aware of any specific IRS guidance on such things. Nor have I heard of anyone getting in trouble for interpreting these things less conservatively than others. But perhaps someone can point us to specific verified cases. Until then, I will presume I am not going to prison for the IRA I started for my child.
I wouldn't be too concerned about setting up an IRA for a child to which $200 is contributed.

The answer to the question about whether 'hobby income' is considered 'earned income' is easily found. Whether or not income is earned via a hobby is irrelevant. This is the IRS's definition of 'earned income':
Earned income includes all the taxable income and wages you get from working or from certain disability payments. There are two ways to get earned income: You work for someone who pays you or You own or run a business or farm
https://www.irs.gov/credits-deductions/ ... ned-income
This may also be informative: https://www.dol.gov/general/topic/youth ... entparents "minimum age requirements do not apply to minors employed by their parents"

'Earned income' doesn't include the requirement that a child go somewhere by themselves (although 8 year olds can go plenty of places on their own; just 30 years ago, 'free range children' used to be the norm - even younger kids walked to school, the park by themselves). Additionally, the IRS says nothing to indicate a parent can't be involved (as a volunteer!) in the work the child does to earn the money.

There are plenty of things kids can do to earn money. Kids are more capable than some in the US today might realize - kids used to do a lot more at younger ages than they do today (they still do in many countries). Kids can grow pumpkins & gourds for Halloween/ Thanksgiving, or flowers, or gather mistletoe. They could sell their old toys at a garage sale. They can rake for neighbors, and when a little older & stronger, shovel. All these are good entrepreneurial things. Kids can easily earn the equivalent of $100 in today's money in a year by age 9-10, maybe sooner. In our family, these were typical, as was saving part of what you earned. Other ways to earn spending money: They can help out in garden - weeding, planting, watering, gathering -- all things that 6-7 year olds can easily help out with. If adults are out there with them, it's a social event, a learning opportunity, and it creates a sense of pride and accomplishment (plus develops knowledge and skills). Once plants are big enough, it's clear what is the weed & what is not; over time, they learn to distinguish when plants are smaller as well. Kids can be paid for other jobs at home as well.
(More details: https://www.kitces.com/blog/tax-rules-h ... tribution/; https://www.kiplinger.com/article/savin ... -kids.html ; https://fairmark.com/retirement/roth-ac ... or-minors/
Young kids are capable of doing these kinds of things, given the proper encouragement: https://thefreerangelife.com/kids-can-help/ or https://morningchores.com/age-appropriate-chores/ ).

---
Link from earlier post in this thread: https://www.fidelity.com/retirement-ira/roth-ira-kids which will help anyone interested in doing this.

elainet7
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Re: Roth IRA for child

Post by elainet7 » Mon Jun 10, 2019 3:08 pm

read millionaire teacher by Andrew hallam

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