Make Your Kid Rich with a Child IRA

Friday, May 25th

We hear it ALL THE TIME "Will Social Security go away?"

Well, chances are it won't be the best financial security blanket for our kids. So, as a parent you can help them plan for retirement now with a Child IRA. Yup, from the day they are first born start building their wealth and feel some relief that they will be just fine in the future.

We cash in with expert award winning financial writer Chris Carosa From Cradle to Retirement-The Child IRA: How to start a newborn on the road to comfortable retirement while still in a cozy cradle.

Chris explains why and how to open a Child IRA

To order the book:

Transcript - Not for consumer use. Robot overlords only. Will not be accurate.

If your parents in this episode is perfect for you would begin you know me as a parent you try as hard as you can make sure that you protect your kids. Make them feel secure and safe and I would fully admit that I tend to David to the extreme sometimes. I AM. Defeated overbearing. Italian mob. Who just wants to micromanage my daughters every move and make sure that she does it ever ever make a mistake but I noticed that the real world. Especially with finances and our kids they're gonna make financial bloggers had when he's still do but to. And I'm hoping you would Greek. We want to feel some relief in knowing bad at least we've given them the tools to sixty. Get them started on the right path in one very important tool according to our guest today. Might be a child IRA. Before we explain what I wanna say thank you for listening to the weekly seven figures podcast all the information that you need to dominate your finances. I can see any waters. Each week we tap into financially savvy people and walk away with little nugget of financial knowledge and thinking to our friends and family first credit union big supporters of the podcast from personal banking to business services and home loans. They are number one priority is finding a solution that works for you locally. Itself is a child IRA something you. Should consists. Cash actually today Chris Krueger stuff award winning financial writer. More than three decades in the investment and retirement business. His most recent book from cradle to retirement the child IRA how to start a new born on the road to a comfortable retirement. While still in a cozy Credo I really appreciate you coming on the podcast today thank you sandy thanks for having me. The concept of a child IRA is so interesting but before we get there. Let's talk Social Security. Because this is what it now leads to planning for our future you hear so much about Social Security is he gonna be there is not going to be there but were paying into it. All lots why would it ever go away. Well some people called Social Security nothing more than a legal Ponzi scheme. Because people who are putting into it today are actually paying other people who are older. That are going to be around anymore I. Now the issue of Social Security is very confusing thing and a lot of people make comments are headlines about it possibly going bankrupt. Frankly it won't go bankrupt color barrier will go insolvent. According to the current projections by the government. That's a subtle difference it really doesn't matter the bottom line is this. Probably people below the age of fifty may not be getting Social Security the way they expect to get it and certainly those below the age of thirty. I'm not even beginning Social Security at all. Do you really think they're paying into it and how can you take doing something that you're giving money to. All right do you know politicians the very end. They can do through the can take something away you are the only way that you don't believe they're taking it away from this. So for example with Social Security it's actually pretty easy and they're doing it now yeah and that his Social Security originally was designed to provide. A short amount of income enough said no no strings attached. Well now if you earn a certain amount of money. You have to pay taxes on their Social Security so that in effect reduces your benefit our Social Security. And that's the way they'll draw downer or or make Social Security less likely to get you at least in full and total. The projections go out shoot 29. B five so that's roughly seventy years from now. And there assuming that they're still be paying it out but it's only being paid out in sixty to 75% rate of what we're currently being promised. So do you think that they would just keep pushing the age okay it's not succeed Tim not 65 tactic to separate out at 75 guy got to act. Because we're living longer because that's a major factor in August him. Well if you look at the original Social Security when it was designed people started getting their Social Security benefits. And the only had a life expectancy of two years more. He gets crazy and I shot in the pot right and guess what we're a lot more healthy than we used to be and we're living. When he thirty years longer after retirement. I didn't prepare and it's tough for it's he can't I mean it's a good news bad news sort of thing you want to live longer and you wanna do you drive people. Enough money to live. We're retired. But that wasn't baked into the cake at the very beginning it's kind of tough to go back in time. Do you feel like. Too many people are banking I'm counting on Social Security to be our only stream of income upon retirement. You wanna know something that amazes me I've talked to lots of people hundreds and hundreds of people. And I am surprised. How many can survive just on Social Security I did not believe in a lot of the financial service writers or talked to. Don't believe it either yet but when we talk to individuals. We see how they can do it ahead one person who just outlined. All the expenses that they expected to have during retirement they were gonna retire in a year or so they had a fairly good handle on their expenses. And they were able to survive just on Social Security so I think that that's an underreported. Statistic I just it just doesn't make headlines it's very hard to believe. Until you actually see you when your own eyes. Well are these the individuals that can live not the most lavish lifestyle. I these individuals who RI so take a trip around the crowds. So due to borrow a term maybe your phrase from Bill Clinton it all depends on what you mean by lavished. So I think that what. One person considers lavish and exciting might be way overboard for another person. And I know like for me. I'm not a person who travels and I don't consider retiring to be to include a lot of travel by the way haven't officially talked my wife about this at home and say that. I don't really think that I need to spend a lot in travel for example in retirement and there's other people with similar sort of proclivities they they would. They they would prefer to do something easier simpler stay at home. I mean I like to right so for me your retirement might just be point 47 writing. And I don't and it doesn't cost what I hear a few bucks for electricity from the computer but that's there. Forgive me for not knowing best the people who who can receive Social Security not only the people who paid into right. Is that part that. Corrects. You're actually hitting had a good point Social Security was originally designed just for retirement. However it has morphed into more than that. Where people with disabilities. Or widows and orphans. All can accumulate some of the benefits from Social Security. That is really what. Makes Social Security most on the edge so they separate the insurance portion of Social Security from the retirement portion of Social Security. Then I think that it'll last a little longer. But that's that's that's kind of like I'm a gap that may be politicians might be too afraid to do. With trump being president has he made any changes or it is there anything that he is focused on that we have not heard of yet. When it comes your Social Security I think the thing about trump is that he said that he wants to protect Social Security a cracked. Now let's transition into pensions because there's a good chunky about that at dissect pensions and with they were created for. Private pensions vs public pensions do you feel like that's a big area that is trying so much of our taxpayer dollars is paying for these pensions. The private pensions are really taxpayer right but the public pensions are you hear about any private pensions anymore are there any companies that really. Oh yeah the bigger companies still have a legacy pensions they're slowly getting rid of them. They're dish into mediating and they powered do you risking those fancy terms that financial people used which basically means they're trying to get out of the pension business. But it sounds like an overwhelming. It is it's the same problem you have with Social Security you have too few workers putting into a pension system that's panning out to too many workers. Because they're living well longer than what was originally expecting that if you look at public pensions that's even worse. Because at public pensions you're allowed to retire at a much younger age so instead of living twenty years longer living forty or fifty years on. Okay now forgive. Mean if you have a pension a public pension you who work hard for really being. Good for you do we all had the option to pick a career that offers that. But I am so insanely jealous. Of those who have a punch in because here we are the good majority of us half to plan that only. For our future and retirement just in case Social Security isn't going to be a lot. We have nothing if it's Social Security doesn't help that's rarely do we have nothing Brooke we're actually supporting the other people right. Which I know it's gonna come out so wrong with that I think is the frustration. And then you hear the politicians they probably need more money we don't have enough. Is. One of the major reasons why I think if you look at some of the more. Innovative states they're trying to shift away from a traditional defined benefit her pension plan. Republican poised. More towards what's called a defined contribution. Or in essence a 41 K plan OK so there the liability doesn't exist at the state level or at the taxpayer level. It goes directly to the individual. Individuals responsible for saving for the wrong retirement just like you and Leo we're responsible for saving arrow 41 K plans or IRA's. Or anything like that. So it states begin to go into that direction do you think they will. Well some states already are states like New York might be a little bit different and difficult just because of the politics of it. But you do see states that are already doing it just a small handful are the small handful right now. Do you really wanna know would make it happen again gusher yeah if you have a state like Illinois totally default on their pensions or California. Those that there are towns in California they're gone bankrupt because we couldn't pay their bench or their pension I'll miss it you've already started to see this if it happened mostly after 2000. 2009 was the nadir the low point of the market and much of these pensions are invested in the market. Because the market went down they didn't have the money to pay off the former employees and retirees. Also the next economic crisis you'll probably see a lot more states being put in that situation. And that in turn will put on the political pressure to shift from this defined benefit to defined contribution. There's really nothing we can yes there as weakens we can become self reliant on. Take responsibility for our own retirement and for the retirement of our children. Any you talked about the history of pension which I do talk about in the book it's a rather fascinating subject I really didn't look into it until I wrote this book. But originally in America if you think about retirement there was no retirement plans well there watts it was your family. That's why farmers had ten kits because those kids would run the farm as the parents got older and it wasn't though you retired. As you do now to a life of leisure it's just you worked less and less. You your work was really assigned based on your capabilities. And the family took care of itself. That change those we shifted from an agricultural economy. To an industrial economy now everyone's working factory you don't have this family support for retirement. Some became more reliant I'm third parties on the factory in we're pensions. I talk a little bit about the history of that and how those public pensions and in private pensions started. But now I'm thinking as I wrote the book is I went through the child irate and I look particularly where it's most advantageous rights and right now. Which is family owned business within family owned businesses. I'm thinking maybe we're seeing the pendulum beginning to swing the other way. Where it's more. Important for families to think how are they going to support each other now it's not the same as a family farm. But the idea of planting seeds for retirement. As the children are young when they're young when they're even newborn going that far back. So that by the time the children are. Ready to Wear the parents are ready to retire the children have a good foundation for their own retirement and so there's less pressure. Financially on the children and maybe they can help apparent to me that parents need help but you see we're saying we're cutting and moving more towards. A family centric solution to retirement. As opposed to a third party whether it be government or corporate. Solution F should be the icing on the cake I think that's really the focus needs to be highly educator solace if there's an influx of individuals who really do one at. Take control of their finances and and take care of themselves and then like you said have the pension her you know the Social Security be the icing on the cake. If you look at the financial behavior over our me Millen meals they tend to be more doing yourself hers there yeah they're less likely to hire a financial professional. Now that's what it's going on right now on that just could be where they are demographically in the financial spectrum. But the fact that they're doing yourself or is the fact that they're willing to study and operate everything in their hand on the phone. Not listened to podcasts like this actually go terribly clear idea. And that's a good sign that's. That's a more of an entrepreneurial type activity and that's something that I think has promised let's move now onto your idea the way that we can solve all of stance is the child IR day. Personal describe the general parents of the general concept is pretty easy. Newborn baby from the from the moment they're born from the first year that they're born. Until age nineteen if that baby or child put a thousand dollars a year so that's a total of 191000 dollars into an IRA. And then turned 3% less. Than the average return that's 3% less than the average return. When that child retires at age seventy which will probably be the retirement age very. You'll have two and a quarter million dollars. So that's an amazing head start I'm getting ready for retirement. The problem of course is that how to they earn that money we need to earn the money in order to put it and so we looked that we interviewed several different people. Both people who have already started child IRAs. People who have had child iris for started for them when they were children to their adults now. And also. The industries that employ children. Andy. You might think well first of all there's a federal law child labor law that says you can't work unless it unless you're fourteen or about. So automatically people think well my child's less than fourteen so great that there's no way this can apply to well yes and now they're two exemption. One of them most obviously if you watch commercials on TV child actors child models. Mean that there has to be a baby that's paid money to do the diaper commercial or yeah he flew commercial. Wind I read that part in the buck as a yeah that's true. But it feels so out of reach for me. I yes and that's exactly what most people think so what can they do. And this is where I turn to the family owned business if you own your own business. You can use your child in your own advertise I'll tell you story. I was that a tough New York press associations and some involved in newspapers and everything. A couple weeks ago and the presenter was a young guy. Who very first thing he did was showed up a slide of him and his wife and his eleventh month old daughter. And neither this is me this my family yeah a at the end I went up to a married sort of jokingly said so how much did you pay your daughter. And he left a hole she just likes taking pictures lovable well then explain the child I Rachel and the fact that I just had a book come out should well what what. You're kidding she owned his own business. And that's where he had the advantage. He immediately said can I buy this book and I said yeah you could witty about you know we're viewed by books I'm like you know that you don't get a few pulls out his phone. Goes to is you know whatever account and buys the book praying for my fix. In this is the reaction that I get when I talk to these. Young family owned business people who have these kids they can't believe that they're really trying to light. Leaving this money on the table one of the headlines that I use is are you willing. She shaved. Taxes today save money on Texas today in exchange. Were increasing fairly well. Well I mean that's that's too good things don't get it where they were the threat that's how easy it it. So I think in the book I describe a lot of examples a lot of case studies of children below age fourteen who are earning money. Now the other exception that I was gonna say to the rule that fourteen well. Is it at a child can work for the apparel business. And here's here's how you really shape the taxes. If the child or minor. And is working for a family owned business where the parents are the sole owners. No income tax because they're not making that much money but even better no payroll tax. It's one of the few exceptions. To payroll taxes that people really don't realize Anna and when I'm going to talk to people talk to groups about this. There are accountants in the room who actually understand yes oh yes I know that well. No but there are fairly or business owners are fairly business owners. Who have never been told that. So wait you mean I could I or my kid and not pay the payroll taxes now that these are three legitimate job you can't just put my on the payroll and I get a rescue oh yeah and I do in the book I list by age weren't the typical kinds of jobs. That these children yeah okay and what about the parents who don't own their own business you can create your own business. And by that I mean. And I talked about family owned businesses are not just talking about. Old time. Corporate type businesses. I'm talking about part time business and talking about doing things on the side whether it's selling cosmetics are. You know whatever sordid side business that I can have OK and that counts. But they need to claim that when you go come tax time you have to say I have a side business of yet. It's whatever you need your or shall provide leadership Armey you could talk to your accountant that they wouldn't normally love your taxes. And they'll tell you. That the best way to do it for your own situation okay and that's what I always say in the book you you know I'm. I'm not an accountant or lawyer you're just following up suggestions idea yeah I talked to a lot of room my interview them in the book you can see what they say. What even if you're reading something that another accountant or lawyer says you need to talk to your own because a lot of these rules are state based. Do we is now I couldn't just open up an IRA. In set money aside from my daughter it has to be. It has to be earned income so that if your dog how old's your daughter and a thirteen year old and eight. Okay so children that age typically will do yard work or they'll do babysitting. Now you could pay them. We're doing that or they could do it for other people and get paid a lot of the examples that I use in the book are exactly that. We're parents will save will take care of the couple hundred dollars and child earns from going on. And put it into an IRA. And you can do that that is earned income yeah track of that. OK so what we opened up the IRA we put it in the child's name. You have to you as the parent or guardian. Technically he's the one who signed the paperwork someone below the age of eighteen and not allowed or is not allowed to sign a contract so you're going to set up. And they're called different names they're called minor IRAs. They're called custodial IRAs they're called those sort of things. It's like a custodial checking account but this is now custodial I or her attack now. Here's the question that an I've been talking to people about this but you know what do you think about this idea it was a great idea my gosh I'm thirteen years behind here and I should've started a long time ago. There're a lot of people who said well wait a minute I have to say for myself I have to save for their college and I had to save for their retirement to. Well of course yes. There's a lot of things in life isn't easy. But if you do it repeating McCain's too much gas you know that was one of the questions that a lot of people have and in fact reporters have that a lot. When I talked to them. This book was was featured on CNBC and in magazines I've got these national. Media people is just like I had an irregular come on you know we're so proud and the we know I interviewed adults. Who had child IRAs. And when I interviewed the parents who set up the irons for their children. Universally I get to two comments one. I should've started this earlier pressure to put more money. And to. This really taught my kids self responsibility. And if you think about it think about what motivates kids. How many kids are so interstate and so caught up. In in video game in any sort of game yeah they like to keep score I don't know if you ever did Tebow already are used to coach if you bought. Of course you don't keep score in that sort of thing as coaches you don't keeps work but every single kid keeps store yet it does. Doesn't matter the sort of look to score so this thing about the child IRA this is what I discovered is I talked to these people. The kids love keeping score even my own kids now I started. Again I didn't see this until my kids were teenagers. And by the way the book tells you how you can catch up now at your teenager but if you view your child is now out of college which you can do that. But what I saw in my own children is this. Can that they're not interest in personally weren't interested in investing but they were into stating counting their money. And this is there money and it really doesn't change can you can't touch the IRA. So all you do over time in you know hopefully if you investment in place you'll see it grow year after year. And you see it grow faster when you make the contribution. So this is almost like a self. Fulfilling. Kind of motivational tool. To get the young kids or the young adults and even at this point motivated to save for their own retirement to think for their future. Even though it's hard for them to think that long term it's hard for grown adults to think retirement yet to watch that number growl. It's the ropes you have the to have all that and highly involved that right. You won't they won't see they won't see seventy at age seventy I don't think an agent they already think ten years on the run around fifty years down the road. So that you can't rely on that. What they do this year over year what's going on and they like winning everybody likes winning and so I got more money this year than you do last year you're winning UK let's do more of this. Yeah okay and have them help contribute she read like and a lot of what you wrote in the book is OK once they earned their money. You just guessed that amount and sit there I airing that she can also have them directly put it in. Right there's two situations where that gifting comes in play and they both have to do really with college. A lot of kids will get money get jobs and they'll save for college. And that's good you want them to do that that's another way of building responsibility. And that money can then go to college they'll spend that money and talent. But it doesn't mean that they can't contribute in the way they contribute is through gifts. And this is where the parents and grandparents whoever. You know that kid has a birthday they they get much 25 dollar check or something well you know what are they gonna do with that check when I let my can go into their Irish. NF thousand dollars a year. Really isn't that much if you break it down if you come and and your special person go out to a fancy dinner once a month. That's a thousand dollars a year. It sounds almost crazy where that's all it takes is a thousand dollars a year and your child will be shot. Yes I mean it to a quarter million dollars is a lot of. Yeah no definitely give you their relief knowing in your kid's going to be okay dance for joy and and prison Derosa from his bugs from cradled her retirement that child IRA how to start a new for an wrote to comfortable retirement. I'm still get cozy cradle we appreciate being here thank you very much senate in altered all your listeners to go to trial Larry dot com. Find out more about this from. You you. Bringing believes he is one more little financial magnate. My dad's Father Knows Best my dad's fifty cents. Have a safe Memorial Day weekend and they do against her subscribing and telling your friends about the seven figures podcast taxi next week. A ball. Half of all mutual fund managers. And and invest in their funds they manage to think about. So before you invest. Your hard earned money in mutual funds as. Your financial planner if demand in Europe that find this personally invested in it. It's a fund manager who doesn't have enough confidence. To invest in it you should needless to.