Roth IRAs for Kids:
Starting Them at Credit Unions
(about 1050 words)
By Hannah McMunn and C. Edward Wall
Starting My Roth IRA When I Was 13
When I was 13, I opened my Roth IRA, I earned the money to open my Roth when I was 12. I had great difficulty earning enough money to open my account, which I will explain below. But since then, I have found much easier ways to achieve this objective – involving credit unions (the following observations may also apply to some banks).
In my case, my grandfather, who lives in Michigan, helped me earn the money with which I could open my Roth account; and he also determined where I would open it. My grandfather has a brokerage account with a discount broker. He found that the same brokerage firm has a local office in Wisconsin within 20 minutes of where I live. Thus, my grandfather planned for me to open my accounts there, so I could do it in person – and experience the process firsthand. My grandfather also wanted me to have an “equity” account with which I could buy stocks, bonds, mutual funds, etc. He believes that learning to invest the money I have in my Roth IRA is a critical part of my financial literacy education. But the minimum account size at that brokerage firm was $500.
The Challenge of Self-Employment Taxes
Earning this amount was a problem because of taxes. I did not have to pay federal income taxes on such a small amount of earnings – in fact there is no income tax on earnings up to $5700. However, I was subject to “self-employment tax”, which essentially is Social Security and Medicare taxes. If my earnings exceed $400, I have to pay about 15-18 percent self-employment tax on my earnings. Thus, in order to have $500 after-tax money with which to open my account at the discount brokers, I needed to earn about $600, pay self-employment tax on that (about $90), so I would have about $510 after taxes with which to open my account. And all that $600 had to be earned in one calendar year. For me, when I was 12, that was not easy to achieve.
Fortunately, I had taken a babysitting certification program at the local Red Cross, and my services were in demand. I also did chores around the house, worked for neighbors, did research for my grandfather, and found other ways to earn income.
Credit Unions: An Easier Alternative
Since then I have found much more simple ways to open Roth IRAs with lower amounts of earned income – which means that even younger kids can open their Roth IRA accounts. One of the best places to open them -- with low account minimums -- is at local credit unions.
But not all credit unions are alike; they have different programs, investment “instruments”, and different policies for placing this information on their websites – so you may have to call a credit union and ask an employee about its programs and policies.
Some credit unions have a minimum IRA account size of $1000 (higher than the $500 minimum at the discount broker where I set up my Roth account), but many credit unions have much lower minimum requirements – some as low as $20 to open a Roth IRA account. If you, your parent(s) or guardians(s) currently are members of a credit union, check out its minimum account requirement for a Roth IRA. If its minimum requirement is quite high, ask the credit union to modify its requirements – especially for kids under 18 years of age. If your current credit union is not sympathetic and supportive of your objectives, then check out the policies of other credit unions in your area. You’ll find one that is.
These smaller amounts of earned income (under $400) are not subject to self-employment tax, eliminating the problem I had starting my Roth with a discount broker.
Opening a “low-minimum” Roth IRA at your local credit union makes it possible to save and invest earned money on a continuing basis. Perhaps in the first year that your Roth IRA account is open, you invest only $100 in earned income. The next year it might be $150. Over several years it will grow and grow; and all that money already is in a Roth IRA.
Unfortunately, your small Roth IRA will not earn very much interest – perhaps as low as .01%. That means for $100 invested you only earn $0.01 (one penny) in interest. It may earn nothing at all. (Whatever the rate is at your credit union, it will be competitive with similar investments at other financial institutions.)
However, earning interest is not your current objective. Your objective is accumulating a large enough sum of money to invest in other higher-growth Roth IRA accounts. My grandfather wanted me to invest in an equities account with a discount broker – where the potential for gain can be much greater, as are the risks. But it would have been much easier for me to earn the money over several years and start my Roth if I had done it with a credit union in the manner described above – and I could have started at an even younger age. Furthermore, I could have transferred those funds to an equities account when I had reached the minimum account size requirement. Based on my personal experience, I urge you to take advantage of any “low-minimum” accounts your local credit unions offer to start your Roth IRAs.
Sources of Additional Information on Roth IRAs for Kids
You can learn much more about Roth IRAs for kids from my website – www.IRAKids.com. My grandfather and I developed this website when I was 13 – as a way to help education other kids and their parents/guardians about the benefits of Roth IRAs.
Recently I filmed a segment on the PBS program, BizKids, which discusses Roth IRAs for kids and the power of compound interest. The YouTube link for that video is: http://www.youtube.com/watch?v=6dzpNd3megg
I also have prepared a PowerPoint presentation on Roth IRAs for Kids, which can be used by you, your parents or guardians, and grandparents to learn about Roth IRAs. The PowerPoint also can be used to make a presentation on Roth IRAs for kids at a boy or girl scouts meeting, at a PTO meeting, a church youth gathering, or on other occasions to share information on this important topic.
The BizKids episode and the PowerPoint presentation are on the homepage of my website --- www.IRAKids.com.
Now is the time for all of us kids to get a financial head start in life and the best way we can do it is through Roth IRAs.
*Hannah was 16 when this article was written during the summer of 2011.
© 2011, IRAKids.com. All rights reserved.
Roth IRAs for Kids: Starting Them at Credit Unions, by Hannah McMunn and C. Edward Wall, describes how Hannah at 12 years of age started her Roth IRA. She opened her Roth IRA at a discount brokerage firm which had a minimum account size of $500. She describes how self-employment taxes, which start at $400 of earned income, forced her to earn almost $600 to have enough “after-tax” money to open her account. She describes how it would be much easier to open a Roth IRA account at a credit union (or bank) that has a low minimum account requirement. Then money earned each year – for several years – can be invested in that account until it became large enough to transfer into an equity brokerage account – rather than start there, as she had done. This article is made available for educational and republication courtesy of IRAKids.com.
This article may be reused freely for educational purposes and may even be reprinted in other print financial publications (e.g., credit union newsletters) to encourage kids to start Roth IRAs as soon as the kids have earned income. The article may not be sold or included in a publication that is to be sold. The article may not be loaded on other websites, but the abstract may be used and/or the article may be summarized on other websites. In all cases, the authors and the IRAKids.com website must be credited with authorship, and links should be provided back to the IRAKids.com website -- for additional information on this subject. For other uses of this article, please contact IRAKids.com.
Other “Free Use” Articles on Roth IRAs for Kids
For additional articles on Roth IRAs for Kids, which may be reused according to the “Guidelines” noted above, please see Articles by Hannah on Roth IRAs -- for Free Reuse Elsewhere.