Minors Can Have Roth IRAs!
Sometimes when I teach interns about finance I ask them this question: “What do you have that I want more of, but you cannot give me?” After some funny looks, someone will answer, “Time”. “Absolutely, yes” I say. Then I explain that time is one of the basic ingredients for a wealth generation recipe. And compounding works over time. More time, more compounding, less time, less compounding. So, the sooner we start, obviously, the more time we have… for compounding! Now make the jump with me, since the younger we are (or our children are) the more time there is for compounding and the more valuable tax free legislation becomes. A minor has a lot of time! But knowing how to capitalize on all of that time is part of the secret.
Since a Roth IRA gains are meant to be a tax free tool, anyone with time, will find these especially valuable. Minors can have Roths! It’s all about compounding over time!
So you can help your 14 year old along to becoming a millionaire if you can help him get some sort of W-2 income from a job. (The W-2 income is necessary to fund a Roth IRA.) Those who understand the tax law have no problem thinking about retirement when their children are 14 years old. I know one family that allows their son to work at the family business (within the framework of child labor laws*) mowing and cleaning in exchange for retirement income. The income can be used to fund a tax-free Roth IRA. Wow! Make sure they actually do the work, because funding a child’s Roth to dilute company profits is NOT recommended.
Remember a child can put away thousands each year and can still withdraw the principal in the future for expenses including college, a first time home purchase etc. This youngster may not be too excited about forgoing another DVD or CD, but eventually he will likely be grateful for the early compounding boost, not to mention the tax free advantages that are very friendly to long term investors.
Owning a business is a cleaver way to use family members for supplemental work but it is not a requirement. W-2 income from any source qualifies them for Roth IRAs. Know that while not every investment sponsor will accept minor Roths, but there are certainly those that will.
* Check your state’s homepage under the business or labor sections.
Kevin Daniels is securities licensed through Investacorp, Inc. A registered broker/dealer member NASD, SIPC.
