Why Your 4-Year-Old Should Have an IRA

Chris Carosa, president of Carosa Stanton Asset Management in Rochester, N.Y. has an interesting idea - one that he says could make a child a millionaire in retirement and not have to save a dime after the age of 18.

It may sound crazy, but it actually works, Carosa says.

"Enter the 'Child IRA,'" he says. "If you saved $1,000 a year for a child from her birth until her 18th birthday, and then never added another dime, that child would have nearly $2 million at age 68."

"Children who do so won't need an ounce of help from Social Security or any other government program if you invest in the 'Child IRA," adds Carosa.

So why aren't parents storming the ramparts to do this? Carosa says the key issue involves kids with no cash.

"Current laws restrict children without earned income to save in an IRA," he states. "Congress would have to pass a law allowing parents to use their earned income to donate to a Child IRA, similar to how a 529 plan works. If politicians want to fix Social Security, this is exactly what they should do."

Financial experts say the idea is intriguing, but would likely fall short thanks, in large part, to crass politics.

"First of all, the math absolutely works for this idea," says Charles C. Scott, a financial planner with Pelleton Capital Management. "The earlier you start, the more you accumulate. That's investment basics 101."

Yet as things now stand, individuals need to have income, specifically earned income, to be able to contribute to the IRA, traditional or Roth," Scott says. "Congress will have to act to change that, so good luck with that," he says. "Sadly, I see the pushback coming from those that would say this would only benefit the wealthy."

Still, the idea is intriguing.

"Compound interest is an amazing thing and including an extra 18 years to any investment does wonders to the end result," notes Chris Durheim, personal finance blogger at KeepThrifty.com and father of three children. Durheim says that, at 7% expected returns, a parent contributing $1,144 per year (less than $100 a month) from age birth to 17 could provide their child with $1,000,000 at age 65. Alternately, a one-time investment of $12,305 at birth would do the same.

"Knowing one's retirement expenses are covered is an incredible gift and could allow our children to focus their careers on where they can make an impact on others and find fulfillment for themselves," he says. "The limitation today on this is that, while IRA contributions can be made for children, they can only be made based on the income that child earned. Obviously, a child earning that level of income at young ages is nearly impossible so following this strategy would only be possible with changes to the regulations for existing IRAs or establishing a new class of IRAs."

It's not easy to generate earned income for children, thus making them eligible for a retirement-savings vehicle, but it's not impossible.

"I have several clients who have been able to pay their babies for modeling or other services and have opened Roth IRAs in their names in order to take advantage of the benefit of tax-deferral or tax-free growth in the case of a Roth IRA," says Adam Bergman, a retirement specialist at IRA Financial in New York City. "The key is finding a source of income for the child."

You really can't count on Congress to act on the idea - inertia is pervasive in Washington, D.C. these days, and few, if any, politicians consider the issue a priority.

That doesn't mean Carosa's idea isn't a good or intriguing one - it is. If parents and advisors can figure out creative ways to generate earned income for their kids, then the path is clear for early IRA investing, and more future wealth for future generations.

After all, who wouldn't want to make their son or daughter a future millionaire at age 18?

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