My son has started to earn a bit of money through odd jobs, and I've convinced him that it would be a smart thing to start an IRA account rather than just blow all of his money on cars and stuff. The reason is the effect of compounding. Basically, for every six years that you have to invest in a wide basket of growth stocks (such as in a diversified mutual fund), you double your money. This means that you'll make twice as much starting at 16 than you will at 22. How significant is this? Well, a 16-year old who starts and IRA and puts in $2,000, then never touches it, will have about $1.2 M at age 70. To get the same result, he would need to put in $4,000 at age 22, $8,000 at age 28, and $16,000 at age 34.
In order to put money into an IRA, you need to have earned income, meaning money that was earned through a job or through starting a business, rather than money that is given to you or money that you earn through investing. All of the money needs to be earned in the year it is put into the IRA, although you actually have until April 15th of the following year to send in the money. So if you earned $2,000 in 2017, you could start an IRA with $2,000 and send in the money until April 15th of 2018.
One issue with a child starting an IRA is that many places have minimum amounts to start the account and minimum amounts that can be invested in a fund. Many of these fund companies require minimum investments of $3,000 or more, which can be difficult for a minor to earn, let alone part with at the end of the year. I found that he could start one with Vanguard with a $1,000 minimum investment, and that he would have two funds to choose from. These would be the Vanguard Star fund and the Vanguard Target Date Retirement funds.
An issue he is having, however, is that even earning $1,000 will be difficult. You see, his summer break is only 2 months long because we have a "modified year-round" schedule where they only get two months off in the summer, then they get a two-week fall and spring break. Add a family vacation and maybe a camp in there, plus he starts with the marching band a couple of weeks before school starts, and he doesn't have very long to work a job. He could work during the school year, but he has quite a bit of homework each night, so his grades would probably suffer.
Luckily, my son is something of an entrepreneur. Seeing a need for regular chips and other good-tasting snacks due to the restrictions placed on the school lunch program by Michelle Obama's initiatives, my son started a covert chip business where he sells chips to his classmates (and sometimes a teacher) between classes. He claims that there is nothing in the school rules against selling snacks out of his jacket, and we've checked as well. He has even started using an ice pack to keep chocolate bars from melting so he has added Hershey bars to the product mix. (He says that girls almost exclusively buy the chocolate, where guys tend to buy chips.) He is learning about running a business since he needs to keep a careful inventory of his expenses and sales so that he can file taxes and start an IRA.
Unfortunately, with his business he was only able to earn about $300 last year and is unsure if he'll be able to continue this year or not. I checked to see if there was a way he could start an IRA with less money. I found that he could actually start a custodial IRA with as little as $100 at Schwab. We will probably open his account this week with the $300 he has earned so far and then add to it as the year progresses. I'll provide reports later on what we invest in and on how his IRA is doing in future posts. Stay tuned!
Anyone out there start a custodial IRA? What has been your experience?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
