Getting an early start on the road to retirement
Now that Roth IRA conversions are available to people who previously hadn’t been eligible, there’s been quite a spike in coverage. However, the spotlight should probably be focused more on those who can have a Roth, but as yet do not.
As many have pointed out, one of those groups is minor children, assuming they have earned income.
It’s an understatement to say the economy has been unkind to teenagers searching for employment. The most recent release from the Bureau of Labor Statistics cites a January 2010 unemployment rate of 26.4% for those ages 16–19. In some states, the rate is much higher.
For those teens lucky enough to secure a paying job, there’s usually a long list of things to spend money on—from immediate needs like clothing and entertainment to farther-off goals such as college tuition. (For my own children, a shared car consumed most of their resources.)
Predictably, what doesn’t make most teenagers’ lists is retirement savings. It’s a question of scarce resources and opportunity—not to mention limited interest. And as an adult, you’re probably balancing your own retirement savings with saving for your kids’ college costs.
But if you do have the means—or, better yet, if your teen is willing to part with some of his or her own money—you might consider helping him or her begin that long journey to retirement. Years from now, funding a Roth IRA with (or for) a qualifying minor is something you’ll probably be very glad you did. Giving your child a 10- or 20-year head start on investing for retirement could yield very valuable results in the end, even if tax rules change along the way.
Ranking your financial priorities isn’t hard. Your retirement savings come first, college second, and then a Roth IRA for your child, along with other competing needs, third. But it’s well worth considering.
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smart idea, and would be far more impressive if Vanguard didn’t impose a $1000 minimum on opening a ROTH.
Because it does, I was just forced to start my 18-year-old Roth on e-Trade (she, like a lot of students had earned income of less than $1,000 in her summer part-time job last year) …. and then buy VIG ETFs
Vanguard, usually, pretty good at practicing what it preaches, needs to offer a low/no Roth with a very low minimum. If Vanguard really wants to attract and hold financially-savvy investors (and their children) for a lifetime, then it needs to do far better than extol the virtues of early ROTH investing.
In this instance, a C- perfomance.
Financial literacy among children is somewhere between slim and nil. That’s why those with paying jobs aren’t thinking about their future. That’s also why this country’s economy is in it’s present condition.
Unless the education systems do now what they haven’t done in the past, nothing will change. Future generations will have to exercise more control over their own financial destinies than at any time in the past. Schools must teach children the meaning of money, how money works, how the economy works and similar topics; that’s financial literacy. Use terms and concepts that are understandable for the particular age group.
That’s how you create the atmosphere for paving an early road to a secure retirement.
I agree with comment #1. The minimum initial investments can be a rather discouraging aspect of Vanguard.
I also agree with #2. Financial literacy in this country is abysmal among many children and unfortunately among many adults as well.
My son is now 8 years old. When he starts earning more than a few dollars, I may try an interesting idea that I read somewhere: offer him a parental match for Roth contributions, perhaps a 50% match within certain limits. Similar to the idea of employers offering employees a 401(k) match to incentivize them to make 401(k) contributions. Of course in the case of a child’s IRA, the money would officially come from the child’s bank account, funded by the child’s earnings, but the parent can always reimburse some percentage to the child. The child just has to make contributions that are within the rules, such as contributing no more than the maximum limit and no more than his or her earned income for the year.
Elllen, thank you for this article. If a parent can encourage and help a child in getting started early on a Roth IRA, that is such a wonderful gift that I am not sure I would have put it below college savings on the list of priorities.
Perhaps a permanent part of the Vanguard website should be devoted to information and ideas about retirement savings for teens and young adults.
I expected to start a Roth IRA for each of my daughters this year with Vanguard. I was very surprised and disappointed to find out I couldn’t do this thru Vanguard because of your minimum of $1,000.
Many firms allow one to open an Roth IRA with as little as $250.00. These firms include T. Rowe Price and Franklin Templeton.
If you can’t come up with a thousand dollars to start a roth for your child you should be more focused saving for your own future.
I agree with comment # 1. It is deeply disappointing that Vanguard expects kids to
earn a minimum of $1,000 to start an IRA. Simply touting the benefits of IRAs for kids is not good enough. Vanguard needs to wake up, and lower its minimum requirements for kids IRAs. My 15-year-old kid earned $200 wages, and so very badly wanted to invest in an IRA, but Vanguard very politely said they couldn’t accept
it.
The point made on Apr. 7 is certainly valid. If we cannot come up with a lousy grand to save for our child’s Roth, we probably should focus full time on our own shaky retirement plans. OK. But the supposition is that we are already contributing to our own retirement. It would be foolish not to; obviously we hit that long before our children face it. The problem clients are pointing out is that a low minimum for a very long term, low priority savings plan is needed. A lousy $1,000 is actually a decent amount of money to the working class, where most people live. The truly wealthy have all the options in the world. All the money managers go after that jackpot. The truly broke essentially don’t save for retirement; they cannot. They can only hope for assistance. The most underserved groups of investors are the working class (those that must work continuously to survive) and the upper middle (who could conceivably get off the wheel for some months or a few years but must then return to work). Those are the people who have just enough lifestyle to need protection and tax-protected savings options, but are extended less opportunity. It would be nice to have client-owned Vanguard break ground here for the rabble. Why not a low minimum fund, perhaps with lockout restrictions, Vanguard? We are, after all, hopelessly devoted.
In response to the above comments, you can’t put $1000 in a Roth for your child unless they had earned income of at least $1000. If they only earned $500, you/they can only put $500 in a Roth, which means they can’t open a Vanguard Roth. It doesn’t matter whether you as a parent can come up with $1000 or not; you are limited by the amount of income the child earned.
The lack of a low-minimum starter IRA at Vanguard is indeed a problem. I have downloaded and shared much “Plain Talk” wisdom with my young-adult children, and they were enthusiastic until they found out they needed $1000-3000 to get started. They all now invest elsewhere.
The $250 beginner’s account, with an automatic monthly contribution required, should be a no-brainer. As a client-owner, I personally would be willing to have the average cost of my Vanguard funds rise from an average .25% to , say, .28% to aid young savers. I bet it would re-pay us all in the long run.
There’s a similar issue here with the $1,000 minimum requirement for accounts like the Prime Money Market. It just doesn’t make sense to keep $1,000 in there continually at a 0.01% yield when it could be profitably invested, yet the accounts may be used as temporary storage or to pay regular expenses and so cannot be closed.
Vanguard needs to think long-term. Small investors often become big investors – and even those who remain small may advise larger ones – like their parents, just moving into retirement and wondering where to roll over their 401(k)s to.
The original blog post was about affluent families looking for every inch of tax-advantaged space, so that they would start retirement plans for their kids. For everyone else it’s just a thought experiment.
It should not have been seen as a chance to lobby for lower account minimums at Vanguard. It is expensive to administer these small accounts, (Much higher than any tax advantages) and would raise costs for everyone else trying to save for their future.
If you have a few dollars to save, put it in a piggy bank or a savings account. It is self-indulgent opening tax-advantaged retirement plans for your kids with these small balances, and expect everyone else to pay for it.
Does Vanguard have a min age for a Roth IRA? My seven year old daughter will earn money this year with a valid W2 and I would like to direct some of it to a Roth IRA.
We made an offer to both of our sons that we would match what they put in a Roth IRA with Vanguard, up to the amount of their earnings per year until age 21. Both sons came up with the maximum investment and have a good start on a retirement account. I hope they have started a life long savings habit.
IRS rules for a ROTH IRA states that the person must have earned income and that the amount contributed in a year cannot exceed either the earned income or the maximum cap – whichever is less. So, if a child earns $500, the contribution can be $500 – whether the actual dollars come from child or relatives.
Lower contribution requirements are a must have for minor Roth IRA’s. Everyone has to start somewhere.
I agree that $1000 minimun is too high for a teenager working part time at his or her first job. I may look elsewhere to get my son started.
Look at this with some logic. Teach your child to save in a savings account first, when the $1000 is saved they can make a decision to invest in a ROTH or use that money as an emergency fund.Teach them to pay as they go and not get into consumer debt. It is nice if they can afford to invest before 25 yrs old but they will have the rest of there lives to invest. I started at $25 a pay period and increased as I could afford to and will do very well as long as the government don’t get us first. Vanguard has been very good to teach not only investing principles but life changing principles as well. “Earn all you can, save all you can, and give all you can.”
Oct 13th’s idea to save in a savings account until you hit the $1000 and then make the decision to invest in the ROTH does NOT apply because, as several others have posted, you can only deposit as much as you earned in that tax year. Maybe the government needs to change the law to allow a minimum ROTH or Traditional IRA deposit of $1000 if the individual had any earnings reported on a W-2? It would certainly help increase the number of individuals saving for retirement and the amount saved, at a small tax cost to the government.
Interesting discussion. My daughter earned less than $1,000 last year. I am having my daughter open an account at my credit union ($25 min) and also open an IRA at the same time. IRA minimum they told me on phone was $100. But I just went through the form on line and it appears that the minimum was actually $25 for what they are calling “IRA Savings”. The other options are IRA certificates for up to 2 years. This is like a CD. These are the only investment choices they offer but for now that is okay. I will keep the IRA at the credit union until she has over $1000 then she can transfer it to Vanguard or perhaps Fidelity. I read on Fidelity website that minimum amount to open an IRA was $3000 but this is waived for rollovers and transfers.
Same here on minimums….guess I’ll take my money elsewhere. I’m just learning about investment but it sure seems to me Vanguard could come up with a low buy in fund and put a restriction on it to keep people from moving in and out of it excessively.
My strategy was fairly simple. I opened up a Roth IRA for my two sons ( $25.00 minimum) at my local Credit Union. When we had met the $1000.00 minimum ( starfund), they transferred it to Vanguard. It’s a two step process, but Vanguard has a good product. Don’t throw the baby out with the bath water ! On a separate note, does anyone know what the minimum contribution to an IRA is ? I thought it was $25.00, if it was an automatic bank draft. But, I can’t find that in writing.
ps
Our goal is… $30,000 by the the time they are 30 years old
Can my 16-year-old open a Roth at Vanguard, with me as guardian? A Vanguard representative told me yes; Vanguard’s online system stops me cold with a “Not permitted in your state.” I’m in New York.
I agree $1,000 is too high for most young people to start a Roth. Vanguard should consider something lower to encourage them to begin investing for the future and at the same time it will HELP Vanguard possibly gain a customer for life.
Isn’t it a good idea to attract new customers when they are young and beginning to develop their future buying habits?