Your Child, Their IRA and How to Get Them Started!
“OMG, Chipotle is my life!”
A couple of weeks ago, I had the opportunity to work with a group of high school seniors who were writing scholarship applications. In between discussions on how to find scholarships and essay writing, we started to discuss saving. I was absolutely shocked to find out that many of these students have been working since they were sixteen years old yet have never had $500 in their bank account. One young lady explained how the majority of the money she earns is spent eating out at fast food restaurants like Chipotle. It made me sad, and equally angry, to know how illiterate they were about the power of earning, controlling (budgeting) and multiplying (investing) their money.
We talk a lot about education and the need for financial literacy. The right education can provide a lot of opportunity, but I would go a step further and say, that education without the knowledge to control and grow your income will not bring financial peace. And who wouldn’t want to gift their child financial peace? In this article, we will discuss how you, as a parent, can gift your child financial peace while helping them start their IRA, at any age!
First things first, let’s discuss the IRS rules for children having IRAs. There are basically two rules that you must abide by in addition to the normal IRA contribution rules: #1 they must have earned income and #2 there must be documented records for each job — date, payment, employer, etc. The first rule is usually the one that causes most confusion. How can a child (under the legal age to work) earn income? Let me explain…
Infant – Kindergarten
Parents who have businesses or have side hustles can employ their own children as models for advertisements that they use to market that business; think the Gerber baby. One rule of thumb that you can use is, if someone else will pay your child to do it then, chances are pretty good; you can pay them to do it as well. Another rule of thumb is, if you pay someone to do it you can more than likely also pay your child to do it, as long as they are capable (have the required skills). I’ll come back to this point later on. Consider this for a minute; when Beyoncé and Jay-Z added their daughter Blue Ivy to their recordings, do you think they missed the opportunity to pay her like they paid everyone else who was “featured” on the songs? Of course, I can’t say for sure what they did but I would bet that Blue Ivy has an IRA… I’m just saying!
6 – 13 years old
During these formative years, there are a few aspiring young entrepreneurs that start micro-ventures beyond the traditional lemonade stand. I am sure by now you have read the stories about Mo’s Bows, Mr. Cory’s Cookies, Jewelz of Jordan, and artist Skylar Grey “The Fresh Prince of Street Art.” Their stories of success must not overshadow many other business ventures started by kids of lesser known names. Kids that are too young to work for people not related to them are just the right age to work for themselves. Billionaire Warren Buffett, was running his own businesses at 13 years old as a paperboy and selling his own horseracing tip sheets. That same year, he filed his first tax return, claiming his bike as a $35 tax deduction. Start them young and who knows what they will become! Check out our blog post School with a Side of Hustle for more business ideas for your pre-teen.
14 – 18 years old
Ahhh, the legal age to work (and pay taxes)! With their work permit in hand, the world is their oyster. There is a sense of freedom that comes from knowing that you can buy your own food and clothes. It is imperative that, during these years, children learn not only how to control their money (saving), but also how to make it work for them (investing). These years represent the last holdout before they are on their own. With that realization comes a sense of urgency unmatched with previous years. Learning to cultivate delayed gratification and saving/investing before spending is absolutely critical to the financial well-being of your budding young adult. With employment comes taxes and an IRA is a brilliant way for your child to start building wealth, tax-free.
Build a Wealthy Mindset
Building a wealthy mindset in your children is not easy. I will give you that. They have tons of outside influences (Hip-Hop Music, Celebrities, Media, etc.) that are counter-productive to becoming wealthy. Looking like ”money” seems to take precedence over actually building wealth. In my household, we have these same struggles; me against the images of “ballin’ out of control” that my son is bombarded with by the media, and the subsequent peer pressure placed on him by the children who have fallen victim to these images.
So, I have a deal with my son; he has to save/invest 50% of everything that he acquires from his entrepreneurial ventures, holiday gifts, and birthday presents. When he wants to buy an expensive item, like a new pair of Jordans, he must first buy at least one share of the stock before he can buy whatever it is that has him excited at the moment. The sequence of events goes something like this: earn/receive money, save 50% towards investments, and plan for spending. The plan for spending requirement allows him to delay the impulse to buy regardless if the funds are available in his savings account for the purchase. The reiteration of this process is just one way that I am trying to instill a wealthy mindset into my 10 year old son, if you have other strategies please share below!
Don’t Have a lot of Money Right to Invest? No Problem! You have options:
- Make Free Stock Trades (no commission fees) with companies like Loyal 3. $10 minimum investment and no fees on the stocks that they offer.
- Take advantage of Free Online Stock Trading Deals
- Buy Stocks Directly from Companies via direct reinvestment plans (DRIP). Minimum investment amount varies.
- Buy fractions of shares if you can’t afford one share right now. Check out companies like Sharebuilder
Let us know your thoughts!