I would like to set up accounts for each of my two children to help them with their retirements (unthinkable to them at age 25). Any suggestions? Thank you!

Terry Says:

Great idea — BUT, in order to set up a tax-deferred IRA (or a tax-free Roth IRA) they have to have “earned income.”  That is income reported on a tax return.  It doesn’t matter if the account is opened with money they have earned, or with a gift from you.  Each could contribute a maximum of $5,000 a year to an IRA — if they earn that much.

So here are my suggestions on how to do it, assuming they have the income.

Open a Roth IRA (A Roth IRA is “after-tax”; they don’t get a deduction — but probably don’t need one — and all the money will grow to be withdrawn tax-free at retirement).

If they have income, get started  by contacting either Vanguard or Fidelity, and opening the IRA in their S&P 500 Stock Index Fund.  You’ll need their Social Security numbers and addresses, and birthdate to open an account.  Each will have a separate account.

Once each account is opened, show them the forms to sign up for an automatic monthly contribution from each of their checking accounts — perhaps $100 a month to start.  Give them an incentive to do that.  Tell them that at the end of next year, and every year, you will contribute a matching amount!  (Keep in mind that the maximum annual contribution is $5,000 — assuming they earn that much.   So the most you could be on the hook for is $2500 each!

Once they see the money growing, they will develop enough pride to make their own full contributions.  You will have given them a gift, an incentive, and a future!  Great combo!

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