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Our daughter is 13 and will have earned income this year. Do you have a list of institutions or funds that will allow her to open a Roth IRA? My personal search has proved fruitless.
You are not alone. Financial institutions can be reluctant to open a Roth IRA for a child because kids can't legally enter into binding contracts. Companies worry that a minor could complain later about how the account was handled or blame the company for poor investment performance.
But many mutual fund families, brokerage firms and banks are willing to open IRAs for children as long as an adult co-signs the paperwork, accepting legal responsibility for investing the child's money. Here's a sampling of kid-friendly companies:
- Mutual funds: Baron (800-992-2766), Invesco (800-525-8085), Janus (800-525-8983), Liberty (800-338-2550), Strong (800-368-1030), T. Rowe Price (800-638-5660), USAA (800-531-8722) and Vanguard (800-635-1511).
- Brokers: Merrill Lynch, Prudential, Smith Barney, Charles Schwab, TD Waterhouse and UBS PaineWebber.
- Banks with a nationwide presence: Chase Manhattan and Citibank.
It bears emphasizing that your daughter has the main prerequisite for opening a Roth IRA: earned income. As long as a child can meet that requirement, we at Kiplinger's believe that a Roth IRA gives children a great head start on saving for the future.
An allowance does not count as earned income. But if children work in informal arrangements -- such as babysitting and lawn mowing -- they can open an IRA. Because they won't be getting a W-2 form, however, they need to keep meticulous records -- noting, for example, the date of each job, the person who employed them and the amount of their earnings.
Like adults, kids can contribute up to $3,000 a year, or their actual earnings, whichever is less. You can't reasonably expect them to sock away all their money. But, to help them fund the Roth, you can give children cash equal to what they earn.
If your son earned, say, $1,500 waiting tables during the summer, he could contribute up to $1,500 to a Roth. If he spent the money or is saving it for college, you could provide the $1,500. Note: You can't kick in an additional $1,500 to bring him up to the $3,000 maximum.
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