Tag: Kids

Retirement, Strategies to Save

Why You Should Open Up a Roth IRA for Your Kids

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A Roth IRA is probably one of the most powerful retirement vehicles available on the market. Unlike a traditional IRA, the contributions made to a Roth IRA are pre-tax, which allows you to withdraw your money tax-free after age 59½ .

When it comes to a Roth IRA, it’s important to think of how you can use it in other ways too, namely, how your kids can use one to become financially successful one day. There are two ways unique ways you can use a Roth IRA to help your children.

The first way is to open one in their name that they can use to save for their eventual retirement. The second is to use a Roth IRA in your name as a college savings account.

Both of these options come with pros and cons, and it’s important to know them before deciding if either of them is right for you.

Opening an IRA in Your Child’s Name for Their Retirement

The challenge of opening an IRA in your child’s name is that in order to open an IRA in your child’s name, the child has to have a paycheck. You can see exactly what qualifies as earned income here. It might seem like this is impossible, but it’s not. Entrepreneurial parents all over the country who see the value in early retirement savings are taking advantage of this.

For example, if you run a business, you can employ your children to stamp your mail, be models for your brochures, and even manage your social media. As long as you issue them a 1099 or a W2 for their work, they are eligible to open a Roth IRA.

Another negative is that you can’t supplement your child’s income to reach the $5,500 cap on Roth IRA contributions. They can only put in what they earn up to $5,500. So if your child only earns $1,500 from working part-time at an ice cream shop one summer, they can only invest $1,500. However, if they earn $6,000 from that same ice cream shop, they can only invest $5,500.

When children have a Roth IRA in their names, the money is officially theirs. This is different from earmarking a savings account for them in your name. Instead, this is money that they earned going into an account that can benefit them in retirement. The biggest pro is that this is an awesome teaching tool for them. You can really show them how their money can compound and grow over the years.

Even if you start the Roth with a small amount and never touch it again, a one-time $5,500 investment (the current Roth IRA contribution limit) can grow to over $100,000 at a 6% return if your child lets it grow from age 12 to age 62. Fifty years of compounding interest will do that!

What an awesome gift that would be if your child never touched this until they were at their retirement age and got a bonus six-figure payout from work they did when they were a kid. That’s a good memory to leave with them.

Opening a Roth IRA in Your Name as a College Savings Account

Many people don’t realize that another great benefit of a Roth IRA is that you can use it as a college savings account. You could use a Roth IRA in your child’s name for their college savings, but let’s say your child doesn’t work, or if they do, you’d rather they kept the IRA for their own retirement one day.

If that’s the case, you could use your own Roth IRA for their college savings, and here’s why. According to Certified Financial Planner, Matt Becker, “If the money is used for higher education expenses for you, your spouse, your child, or your grandchild, there is no 10% penalty.” (Usually, if you withdraw earnings from a Roth before age 59 ½ there would be a penalty, but not if the money is used for college.)

The downside to all this is that if you use this money for your child’s college education, then you’re not saving it in your Roth for your own retirement someday, and that’s pretty important! The pro is that your money isn’t locked into a 529 plan where you have to use the money for qualified higher education expenses. Another interesting pro is that 529 assets are counted toward your Estimated Family Contributions on the FAFSA, but investment accounts, like Roth IRAs are not.

That said, it’s important to look very closely at the differences between 529 plans and Roth IRA plans if you want to use your Roth as a college savings vehicle. Additionally, if you are a high-income earner, you might not be able to contribute to your own Roth IRA unless you do what’s called a backdoor IRA. The current 2017 income limit for Roth IRA contributions is a $186,000 annual income for those who are married and filing jointly or $118,000 for those who are single.

As you can see, Roth IRAs are great accounts for a variety of different savings purposes, and you should try to think outside the box when it comes to using them to help your children create a bright financial future.

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Featured, Investing

3 Strategies to Teach Your Child to Invest

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3 Strategies to Teach Your Child to Invest

Chicago, Ill.-based actor Mike Wollner says at ages 7 and 10 his daughters are already learning how to invest.

Three years ago, Wollner opened custodial brokerage accounts for the girls through Monetta Mutual Funds, which has a Young Investor Fund specifically for young people to invest for the future. Through the fund, parents can open custodial brokerage accounts or 529 college savings accounts on behalf of their children, as well as get access to financial education and a tuition rewards program.

Wollner decided to open the accounts once his daughters began to nab acting gigs and earn an income. They’re already beginning to understand what it means to own a part of the world’s largest companies. “They will ask me to drive past Wendy’s to go to McDonald’s and say, ‘well, we own part of McDonald’s,’” he says.

Wollner hopes his daughters will have saved enough for college by the time they graduate high school. His 10-year-old’s account balance already hovers around $13,000, while his 7-year-old has a little less than $10,000 saved for college in her account.

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The contents of the package a child receives in the mail when an adult opens a Monetta Mutual Young Investor Fund custodial account on their behalf.

The Value of Starting Young

The Monetta Fund is only one example of a way to invest on a child’s behalf. The downside to using an actively managed investment account like the one Monetta offers is that it comes with higher fees — the fund’s expense ratio of 1.18% in 2016 is higher than the 0.10% – 0.70% fees typically charged by state-administered 529 college savings plans.

In addition to 529 plans, parents can open Coverdell Education Savings Accounts, or other custodial brokerage or IRA accounts through most financial institutions like Fidelity, Vanguard, or TD Ameritrade.

A college fund serves as a great way to teach kids a little about the time-value of money, but they’ll need to know more than that to manage their finances as well as adults.

“There’s no guarantee that they are going to be financially successful because anything can happen in life, but you’ll be better off with those skills and have a better chance of being successful with those skills than without them,” says Frank Park, founder of Future Investor Clubs of America. The organization operates a financial education program for kids and teens as young as 8 years old about financial management and investing.

He says FICA begins teaching financial concepts at an early age with hopes that the kids who start out with good money management habits now will continue to build on them as they age.

“If they fail to get that type of training now, it may be years into their late 20s, 30s, or 40s before they start. By then it could be too late. It could take 20 years to undo the mistakes they’ve made,” says Park.

3 Ways to Teach Young Kids About Money

Use real-world experiences

Wollner has each daughter cash and physically count out each check they receive from acting gigs.

“They just see a big stack of green bills, but that to a child is cool. It’s like what they see in a suitcase in the movies,” says Wollner.

He then uses the opportunity to teach how taxes work as he has his daughters set aside part of the stack of cash to pay taxes, union fees, and their agent.

“They start to see their big old pile of money diminish and get smaller and smaller,” says Wollner, who says the practice teaches his daughters “everything you make isn’t all yours, and I truly believe that that’s a lesson not many in our society learn.”

Kids don’t need to earn their own money to start learning. Simply getting a child involved with the household’s budgeting process or taking the opportunity to teach how to save with deals when shopping helps teach foundational money management skills.

Park urges parents to also share financial failures and struggles in addition to successes.

“They need to prepare their kids for the ups and downs of financial life so that they don’t panic if they lose their job, have an accident, or [their] identity [is] stolen,” says Park.

Gamify investing

Gamified learning through apps or online games can be a fun way to spark or keep younger kids’ interest in a “boring” topic like investing.

There are a number of free resources for games online like those offered through Monetta, Education.com, or the federal government that aim to teach kids about different financial concepts.
Wollner says his youngest daughter benefited from playing a coin game online. He says the 7-year-old is ahead of her peers in fractions and learning about the monetary values of dollars and coins.

“This is how the kids learn. It’s the fun of doing it. They don’t think of it as learning about money, they think of it as a game,” says Bob Monetta, founder of Monetta Mutual Fund. The games Monetta has developed on its website are often used in classrooms.

When kids get a little older and can understand more complicated financial concepts, they can try out a virtual stock market game available for free online such as the SIFMA Foundation’s stock market game, the Knowledge@Wharton High School’s annual investment competition, or MarketWatch’s stock market game.

“The prospect of winning is what makes them leave the classroom still talking about their portfolios and their games,” says Melanie Mortimer, president of the SIFMA Foundation.

Anyone can play the simulation games, including full classrooms of students.

Aaron Greberman teaches personal finance and International Baccalaureate-level business management at Bodine High School for International Affairs in Philadelphia Penn. He says he uses Knowledge@Wharton High School’s annual investment competition in addition to online games like VISA’s websites, financialsoccer.com, and practicalmoneyskills.com, to help teach his high school students financial concepts.

Adults should play the games with children so that they can help when they struggle with a concept or have questions. Adults might even learn something about money in the process. Consider also leveraging mobile apps like Savings Spree and Unleash the Loot to gamify financial learning on the go.

Reinforce with clubs or programs

For more formal reinforcement, try signing kids up for a club or other financial education program targeting kids and teens.

FICA, the Future Investors Clubs of America, provides educational materials and other support to a network of clubs, chapters, and centers sponsored by schools, parents, and other groups across the nation.

When looking at financial education programs, it’s important to recognize all programs are not equal, says FICA founder, Frank Park.

“Generally speaking, you’re going to go with the company that has a good reputation of providing these services, especially if your kid is considering going into business in the future,” says Park.

The National Financial Educators Council says a financial literacy youth program should cover the key lessons on budgeting, credit and debt, savings, financial psychology, skill development, income, risk management, investing, and long-term planning.

Mortimer suggests parents also try getting involved at the child’s school by offering to start or sponsor an after-school investing club. She says many after-school youth financial education or investing organizations nationwide use SIFMA’s stock market simulation to place virtual trades and compete against other teams.

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News

5 Things to Get in Order When You Have Kids

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Overcoming the Struggles of Unpaid Maternity and Paternity Leave

Everyone likes to talk about how much money it costs to have and raise kids, but one other topic that sometimes gets glossed over is all the other financial and life details that new parents should have in place before their first child is born (or shortly thereafter, at least).

While we wouldn’t call this a finite list, the following are definitely some of the more important documents and plans you’ll want to have in mind before little Junior makes his or her appearance.

1. Put together a will and trust

Besides the obvious advantages of leaving your possessions and assets to the people you pick, a will is important for a lot of other reasons — for people with and without kids. When you do have kids, though, this becomes even more necessary as a way to legally name guardians for your children should something happen to both you and your significant other. When you don’t have a will in place that names these guardians, a court would decide what happens to your children, where they go and who will raise them, if something were to happen to you, and that’s probably not what you’d like to have happen.

One other important thing to keep in mind is the difference between custodians and guardians. Remember, the person you name as your child’s guardian doesn’t necessarily have to be the person who’s also in charge of your child’s finances. That duty can go to a custodian, who will then take care of any money left in your kids’ names until they turn either 18 or 21 and can take over that task for themselves. Check out this piece for more on how to put a will in place if you need one.

2. Get a life insurance policy

When you have a family, it becomes even more important to put some sort of life insurance policy in place as a way of ensuring that, if something happened to you, the spouse who is still around will be taken care of financially, and so will your kids. While you can set up your life insurance policy for whatever your want it to cover, most financial experts who help you pick one will ask you to consider certain factors, such as:

  • Do you have a mortgage to pay off?
  • Do you want to put one or more kids through college?
  • What sort of monthly finances would be necessary to replace the lost parent’s income?

Adding all these factors together, you’ll be presented with an approximate amount that would cover all of these situations, should something happen to you. While the overall number might scare you at first (think in the millions here, especially if we’re talking about putting a couple of kids through college), there are actually some great plans on the market today that won’t cost you an arm and a leg each month to get.

3. Consider disability insurance


When it comes to disability insurance, consider it this way — if you’re young and healthy, the odds are much greater that you’ll injure yourself and be unable to work for a given amount of time than that you will actually pass away (at which point your life insurance policy would come into play). A disability insurance plan would help cover your family’s necessary expenses while you get back on your feet. Group disability plans are often through employers, and while individual plans are available, they are likely to be a bit more costly depending on your particular situation (if you’re older with high cholesterol, for example, you’ll probably pay more than a young, healthy person). On the other hand, if you’re okay with what your employer offers but would like a little bit more coverage, a supplemental plan might be able to help you make up the difference. For more on disability insurance, check out this story.

4. Have a power of attorney


A power of attorney isn’t necessarily something many people think about when it comes to financial planning, but it probably should be. Assigning someone power of attorney gives them certain rights to make decisions for you based on the type of power of attorney you pick. For example:

  • General powers of attorney retain comprehensive rights to act on your behalf, and this type of power of attorney can last until you pass away.
  • Limited powers of attorney can only make decisions for specific purposes and for a set amount of time. This might be useful during something like an illness, where you are unable to make financial decisions yourself.
  • Durable powers of attorney essentially maintain all the same rights to serve for you as a general power of attorney, and their powers remain effective even after a person becomes incapacitated, so there is no need for court involvement.
  • Durable powers of attorney for health care allow you to name someone to make health care decisions for you when you cannot make them for yourself.

Setting up a power of attorney ahead of time for whatever your needs might be can save your family a lot of time and trouble (and legal woes) if something happens to you.

5. Create a living will

A living will is a statement that details your desires regarding medical treatment and the like when you are no longer able to express these things yourself. Putting something like this in place helps take the burden off your family to make these decisions during what will likely already be a stressful and emotional time.

Again, while there is much more to estate planning than just the policies and documents listed above, starting with them will help you rest assured that your family will be taken care of emotionally and financially, no matter what the future may bring.

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