Your Child’s IRA

From AASLCS@aol.com: “What about an IRA for a kid less than 14? After I saw a story in The Wall Street Journal, I asked my accountant and he said it does not make sense for an eight-year-old because the IRA is not a deduction for him.”

I don’t agree with that.

It’s hard to imagine what an eight-year-old could do to earn any money that would qualify for an IRA. (I once bounced up and down on Rayco seatcovers to demonstrate their ruggedness for a TV commercial, but that was long before IRAs, and I only got $10.) But assuming he or she has actually earned some money at arm’s length — getting paid by you for chores around the house won’t cut it — an IRA is a great idea.

No, your child probably doesn’t need the tax deduction. Indeed, she would not claim it. She would file Form 8606 for nondeductible IRA contributions. But look at the advantages. As per my July 19 comment:

1. Your child gets into a working/saving habit. This alone is priceless.

2. Maybe she learns a little about investing and capitalism. This can’t hurt, since it’s the foundation of our prosperity.

3. If your child puts $1,000 a year into an IRA from age 12 through 21 and then stops, and if the mutual fund grows at 10% a year, then the income from those ten summer jobs — $10,000 — will grow by age 70 (when withdrawals must begin) to $1.7 million. Net of 3% inflation that would really be only about $300,000 in today’s dollars. But how many 70-year-olds do you know today who wouldn’t be glad to have an extra $300,000 sitting in an IRA to boost their annual income?

Not all brokers and mutual funds will set up an IRA for a minor, but if yours won’t, I’m told Merrill Lynch and the Vanguard group of funds, among many others, will.

Tomorrow: The Janus Fund versus Lindner Dividend