IRA for teenager

[disneysteve]

I want to have my daughter (age 17) open a retirement account for 2012 as it is the first year she had real earnings. I know that she can only put in up to what she earned, which is below the maximum contribution. I plan to discuss this with our accountant before actually doing it but thought I'd run it by you guys, too.

I'm thinking she should go with a Roth since she is in a super low tax bracket now. The traditional IRA deduction isn't really worth anything to her. The Roth, with no taxes ever, must be the better deal - right?

The other question is logistical. I know she can't open an account on her own until she's 18. Her bank account is in my name as custodian. Would the Roth work the same way until September when it could convert to her name?

[creditcardfree]

From my experience in the mutual fund industry in the past, you are correct that you would be the custodian until age 18.I would talk to the fund company to get clarification.

[Petunia 100]

Absolutely, she should go for the Roth.

I did a quick Google search, and turned up this "question from a reader" in Kiplinger's "Ask Kim" column:

Kiplinger - Interstitial

[disneysteve]

Thanks, Petunia. That's very helpful.

That article is old so I'll make sure the facts are still accurate and then probably have her open an account at Scottrade. I already have 2 accounts there. She won't have enough money for Vanguard's minimum but we can always have her transfer it in a few years when she does.

[heyaim]

I love the idea and have talked with our accountant about it for my daughter (19) and son (17). He said to go with Roth also. Such a wonderful advantage your daughter will have by starting an IRA at such a young age!

I wish someone would've done this for me at a young age. Or even talk with me about planning for the future.

[moneybags]

Definitely go with the Roth to take advantage of the low tax rate. I have IRA's for both of my kids. They are in my name & theirs. My oldest turned 18 a year ago, but I haven't changed her account yet (adding to my to-do list).

I have "matched" my kids deposits and/or just gifted them money up to the amount of their earnings.

[scfr]

If your goal is an account with Vanguard, you could just park the IRA in a short-term CD for a year or two until she has enough for the $1K minimum (for Target Retirement Funds or STAR).

[disneysteve]

If your goal is an account with Vanguard, you could just park the IRA in a short-term CD for a year or two until she has enough for the $1K minimum (for Target Retirement Funds or STAR).

Oh. The STAR and Target funds are also $1,000 min. That's interesting. We should be able to do that now. In addition to her "real" job income, she also babysits. We don't have a W2 for that, of course, but she does have a log of that income for taxes. That will put her over the 1K limit.

[sblatner]

I just did this for our 17 year old who had his first real earnings this year. We put $2k in a Roth for him. It is under his name and my name until he turns 18 in August. We set it up at American Century. I couldn't do the online application as it says you have to be 18 but then called and they said it is perfectly okay, I just had to mail in the application. I did that and they never called to ask questions or anything - worked just like clockwork.

I think a Roth is best as they don't owe any taxes so there would be nothing to deduct a regular IRA from.

[scfr]

Oh. The STAR and Target funds are also $1,000 min. That's interesting. We should be able to do that now. In addition to her "real" job income, she also babysits. We don't have a W2 for that, of course, but she does have a log of that income for taxes. That will put her over the 1K limit.

From the Vanguard web site: "If you want to start out small, the minimum initial investment amount for Vanguard Target Retirement Funds and Vanguard STAR® Fund is just $1,000."

https://personal.vanguard.com/us/whatweoffer/mutualfundinvesting/accounts

Kuddos to you and your daughter for the early start on retirement savings!

[disneysteve]

Kuddos to you and your daughter for the early start on retirement savings!

I'm trying to teach her well and give her a good head start. She is in a pretty good situation for her age. She has about 9K in her bank account which has come from various gifts, work, and the bulk of it from her Bat Mitzvah 4 years ago. In September, when she turns 18, she gains access to about $2,500 more right away and a monthly annuity payment stemming from a personal injury settlement when she was 6. I've been working with her over the years to understand personal finance so that once all of that money is in her control, she'll know how to handle it responsibly.

[GrimJack]

Thanks, Petunia. That's very helpful.

That article is old so I'll make sure the facts are still accurate and then probably have her open an account at Scottrade. I already have 2 accounts there. She won't have enough money for Vanguard's minimum but we can always have her transfer it in a few years when she does.

Just a quick warning about Scottrade - they do not DRiP their accounts. I switched from TDWaterhouse to Scott a couple years ago then found out that they will not reinvest any dividends; this bummed me out so muchg I switched back to TDW within 3 or 4 months. I don't know how important reinvesting is to you but it was a deal-breaker for me. It did not even occur to me to ask the scottrade people until after the move.

[Slug]

Can't wait to do this for my son in a few years. Definitely Roth.

[Mr Nice Guy]

Just a quick warning about Scottrade - they do not DRiP their accounts. I switched from TDWaterhouse to Scott a couple years ago then found out that they will not reinvest any dividends; this bummed me out so muchg I switched back to TDW within 3 or 4 months. I don't know how important reinvesting is to you but it was a deal-breaker for me. It did not even occur to me to ask the scottrade people until after the move.

They will reinvest dividends and gains for mutual funds.

Is it common for brokerages to not reinvest divs on common stocks as a way to drive up comission revenues or what?

[disneysteve]

To update the conversation, we did our taxes on Thursday. DD is eligible to contribute $1,686 to a Roth for 2012! I just printed the application form for Vanguard (it can't be done online) and filled it out. We're going with the Target Fund, and yes, I gave her a lesson explaining what a Target fund is and the pros and cons of using one. I'll mail everything off on Monday so they will have it in plenty of time before the 4/15 deadline.

This is her first real investment. Pretty exciting. As long as she keeps contributing for the next 40-some years, she'll be all set.