A Roth IRA for the Baby?

“Owning stocks is like having children – don’t get involved with more than you can handle.” – Peter Lynch

“When you have children, you spend a lot of time with people you never would have chosen to spend time with, not in a million years.” – Louis CK

My wife is due any day now with our first child. It’s an exciting time in our lives.

But the long-term planner in me is always thinking ahead.

In addition to all of the normal getting-the-house-in-order type of things that come along with having a baby, I’ve been figuring out the financial planning logistics as well.

The big list includes setting up the 529 college savings plan, getting our life insurance where it needs to be, shoring up the emergency fund and making sure I have $241,080 saved up (that’s how much they tell me it costs to raise a child until age 18…piece of cake).

One of other areas I’ve been looking into is setting up a Roth IRA in my future daughter’s name. I thought doing this would be a great way to teach her the benefits of saving, investing in the financial markets and compound interest.

Right now this would be impossible to do because she will earn no income (freeloader).

Luckily, there is legislation in the works that could fix this problem. An article from Reuters shared the recent developments on the topic:

The legislation calls for a simple change to the eligibility rules for contributing to a Roth account. Currently, account owners must have earned income to contribute, though there is an exception for non-working spouses. Under the RAYS (Roth Account for Youth Savings) Act, contributions could be made to the accounts of children whose parents have earned income.

Were it law today, up to $5,500 could be contributed this year from any source – parents, grandparents or family friends. Withdrawals would be subject to the regular IRA withdrawal restrictions – in other words, no penalty-free withdrawals before age 59 1/2, with the exception of education expenses or a home purchase.

Putting just in $100 a month into this type of savings vehicle at a return of 6% a year would result in over $50,000 by age 21. That fifty grand earning 6% a year would be worth just shy of $300,000 by the time they turn 50 (and that’s assuming no additional contributions).

This account could be used for birthday or holiday money when the child is younger (why bother with savings bonds if they have such a long time horizon?).

Once they’re older you could move to a system where you match any amount they put into the account to teach some responsibility.

I really hope this bill passes. The earlier our children start to save the better. It could also mean less dependency on their parents after college (my real motive here).

This makes so much sense it will probably never happen.

Why a Roth IRA for the baby would be a blessed event (Reuters)


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  1. aB commented on Mar 17

    First of all, congrats! Totally understand if your blog goes un-updated for a while.

    Was curious about that a well, because RRSP has a $2000 lifetime exemption, though about putting it in and just sitting there, but apparently the exemption is only available when you are 19.

    So, using a part of my wife’s TFSA (post tax money in, tax free coming out) for my son’s (2.5 years old) birthday money. Kept all the cards and put slips of paper detailing how much money (from whom, and why). Going to make him count up all the slips of paper, then show him his portion (all the XIC in the TFSA is his) when he is .. 12-13(?).

    • Ben commented on Mar 17

      Thank you. I’m sure I can still find some time to write even though life will be a little more hectic.

      You raise an interesting point here — when to start bringing up finances and teaching your kids about this kind of stuff. I have some time but it’s something I will be thinking about.

      Sounds like you have the right idea on getting things started early.