Frequently Asked Questions
Question #1: I like it! The Child IRA is a tremendous way for me to introduce a valuable tool to my clients. I do wonder, however, if it’s a good idea to “guarantee” a person’s retirement. In some ways worrying about our futures make us better as it’s an
Answer #1: First, like any other IRA, there are no “guarantees” regarding what the future might look like, there are only probabilities. The calculations assume an average growth rate of 8% – which is 3% below the historical average growth of 11% a year (that’s enough to account for inflation, fees, and whatever else you want to account for). Then there’s this mathematical reality: The $2.5 million 70 years from now merely replaces Social Security – the child will still need to save for retirement as an adult in order to secure a comfortable retirement. If that doesn’t answer the “ambition” question, consider this. There’s this behavioral trick bartenders do to encourage tips: They always place a few dollars in the “Tip Jar” before the customers arrive. Seeing money already in there encourages patron to add to the kitty. Think of this Child IRA as the “Tip Jar.” Once the child sees the money accumulating year after year, it is likely to trigger a behavioral response consistent with bar patrons: They’ll be more likely to save more!Last updated:
Question #2: I also wonder if people would be more apt to tap into funds that they didn’t save themselves?
Answer #2: If that doesn’t answer the “ambition” question, consider this. There’s this behavioral trick bartenders do to encourage tips: They always place a few dollars in the “Tip Jar” before the customers arrive. Seeing money already in there encourages patron to add to the kitty. Think of this Child IRA as the “Tip Jar.” Once the child sees the money accumulating year after year, it is likely to trigger a behavioral response consistent with bar patrons: They’ll be more likely to save more! Oddly enough, the book interviews quite a few “children” who are now adults and whose parents established IRAs for them. Most of them seem to value the “lesson learned” and are even interested in starting Child IRAs for their children. One person, who had a Roth instead of a traditional IRA, did use some of the money to pay for graduate school. This is the issue with the Roths, but not the traditional IRAs, since the Roths allow for non-penalty withdrawals for education. In both cases, withdrawals normally aren’t allowed until age 59½.Last updated:
Question #3: If parents learn that their children did use the money for frivolous purchases, how would they react and what impact would this have on the relationship they have with their children (i.e., “I can’t believe little Billy spent his retirement o
Answer #3: As mentioned, money from IRA cannot be withdrawn without penalty until age 59½ (except in the case of the Roth and that’s for the sole purpose of funding education expenses). That doesn’t mean you can’t take the money out before hand, it just means there’s a significant disincentive for premature withdrawals. Still, that’s better than no disincentives for Custodian Trusts established for children. For the most part, these trusts are releases “no strings attached” once the beneficiary reaches early adulthood. There is an alternative which still uses the IRA vehicle. This involves either parent establishing an IRA (most likely a Roth) in their name and listing the child as a beneficiary. This way, the only way the child gets the money is if the parent dies. At least then the parent won/t have to suffer to see how the money is squandered. �Last updated:
Question #4: Saw the video on the Child IRA. Great concept, but a child can’t open an IRA unless they have earned income. The video says to put money into a Child IRA at birth til age 19, but the child normally can’t work until 16. Explain how it works?
Answer #4: This is a great question as well as a common misperception. It’s perhaps the single greatest reason why we haven’t seen many people taking advantage of the Child IRA for their young children. In fact, children below the age of 16 do work and earn income. Yes, babysitting and mowing the neighbor’s lawn counts as earned income, but children have real jobs, too. You don’t think all those child actors work for free, do you? In addition to certain industries that regularly employ children under the age of 16, family owned business generally have no age restrictions when it comes to employing their own children. From Cradle to Retirement – The Child IRA – How to start a newborn on the road to comfortable retirement while still in a cozy cradle explains how to establish a Child IRA today in precise, easy-to-understand (and duplicate), detail through actual real-life case studies, interviews with industry professionals familiar with the ins and outs of hiring children, along with expert guidance from financial professionals versed in the mechanics of establishing Child IRAs.Last updated:
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