Should You Start an IRA For Your Kids?

Written by , October 15, 2013

Should You Start an IRA For Your Kids?When we think about individual retirement accounts, and how important it is to start them early in our careers, we might assume that this means opening our first account when we get our first job after graduation. But this thinking is unnecessarily restrictive, and people can greatly improve the chances of a financially successful and secure retirement by starting their IRAs even earlier than that.

Instead, you should be working to help your children begin their own IRAs as early as possible. The IRS rules governing IRAs actually have no minimum age requirement, so your child can have their own account as long as they have their own earned income.

Here’s some retirement advice about starting an IRA for your kids:

  • They’ll Need Earned Income. The only requirement for starting an IRA is that the individual have earned income at least as great as the amount of the contribution they are seeking to make. A summer or part-time job will enable them to meet this requirement. If you own your own business or can otherwise employ your child then that works too; just be sure that the employment or contractor relationship is genuine and that you document it as you would any other employee or contractor you engage.
  • Start it With Them, Not For Them. One of the most important duties of being a parent is teaching your children financial responsibility and independence. They need to understand that the security of their financial future is their personal responsibility, and that they should never rely on anyone else to make sure everything is taken care of. This means that they need to understand how IRAs work, why they can be so valuable, and why they should be worrying about retirement at all at this point in their lives.
  • Help Them Learn About Investing. Helping your child start their own IRA can also give you a context within which to teach them about investing. Teaching your child investment basics at an early age can prove invaluable to them in later life, but it can be difficult to do so in the abstract. Trying to educate them on investing principles without a firm context that has relevance to them is likely to be ineffective. But when your child has their own account, you can walk them through their account statements, follow the investments that they help choose, it gives them a genuine reason to be interested.
  • Help Them Develop a Habit of Saving. When your child has their own IRA, and begins to understand why it’s so important to make regular contributions to it, they’ll develop a habit of saving that will serve them well throughout the rest of their lives.
  • By helping your child start and contribute to their own IRA, you are making it much more likely that they’ll be able to save enough for their own retirement. It’s not unrealistic to think that by starting their account early they could graduate college already having a retirement nest egg of many tens of thousands of dollars.

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