Steve spoke with Chris Carosa, president of Carosa Stanton Asset Management, author of From Cradle to Retirement: The Child IRA, and a Forbes contributor. Chris talked about how early an IRA can be started by parents for their children, a new book that he’s working on, and a website that ties it all together.
Start Your Child’s Retirement Savings Early
There’s no lower age limit on IRAs, so, you can literally start one for your child as soon as they begin earning an income. Contrary to popular belief, this can start pretty early—like three-months-old early. If you’ve ever seen a diaper commercial or print ad, the babies aren’t working for free. They earn an income that the parent guards. Why not put it into an IRA? The only “catch” is that your child does need to be earning an income every year that IRA contributions are made. Fortunately, there are creative ways, like modeling work, to handle that. You can get more ideas at Chris’s website.
Getting Into The Numbers
So, what’s the advantage of starting an IRA for your child when they’re very young? Let’s find out by taking a look at the numbers. If you start an IRA for your child when they’re three-months-old and you’re able to put away, for example, $1,000 per year for 19 years, you can make your child a millionaire by the time they’re 70. That’s assuming their IRA earns about 8% annual interest, which is actually 2-3% below the current average. At that rate, your child would have a retirement account worth approximately $2.25 million at age 70. That’s the miracle of compounding.
New Book And IRAs For Teens
In Chris’ new book, Parents Guide to Turning Your Teenager into a Millionaire, he discusses the same format used for a teen, starting an IRA for them at 13 and then stopping contributions at age 18. The primary difference is allowing for a maximum contribution per year, which is around $6,000. Making maximum annual contributions is more feasible because the child is older and more capable of earning income on their own. Making the maximum yearly contribution, they can put $36,000 into an IRA in just six years. What will that $36,000 (assuming 8% average annual returns) look like when they’re ready to retire? At the age of 70, your child will be able to retire with about $2.5 million. That’s not a bad return for just six years of saving.
You can learn about all Chris and his practice at https://carosastanton.com/. You can also see his current book, find out when his latest book drops, and learn all about setting up an IRA for your child at childira.com.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: I was reading Forbes not too long ago, and I came across this article about can my child have an IRA? And you know, I was instantly reminded of this idea of a child Ira and re-intrigued about it. So, I decided to reach out to the author of the article and ask him to come onto the show to discuss it with me. His name is Chris Carosa, he’s the president of Carosa Stanton Asset Management. As I said, he contributes to Forbes, and he’s also the author of From Cradle to Retirement: The Child IRA. And he has other books as well.
Steve Pomeranz: Chris, welcome to the show.
Chris Carosa: Hey, thanks for having me.
Steve Pomeranz: Sure. So, what are we talking about here when we’re talking about IRAs? Are we talking about traditional IRAs for your child or Roth IRAs? What are we talking about.
Chris Carosa: Well, actually you can do either one. The flavor, it really depends on the tax situation of the child. What a lot of people don’t realize is that there’s no lower age limit for starting an IRA. So, it’s just like an adult IRA except it’s for a child. The difference being children can’t sign the contracts, so a parent or a guardian has to sign it for them.
Steve Pomeranz: Don’t you have to have earned income or some kind of a W2 wage in order to do an IRA?
Chris Carosa: Yes, you do, that’s the one caveat, the one hitch in this whole thing, is you have to have an earned income.
Steve Pomeranz: How do I put my three-month-old to work, that’s the question?
Chris Carosa: I was just going to say, how many newborn babies do you know that are drawing a salary? Well, here’s the thing, think about this. You watch TV, right?
Steve Pomeranz: Mm-hmm (affirmative).
Chris Carosa: And you see commercials. And undoubtedly at some point, you see a diaper commercial.
Steve Pomeranz: Yes.
Chris Carosa: Those babies aren’t working for free, they’re getting paid. So, there’s a way that young babies can earn money legitimately through modeling, through performance. In fact, in New York State, it’s the only legal way a child under the age of 11, I think, can earn money. There’s some gray area between 11 and 14. But it’s a way, modeling.
And it’s not just a TV ad, if you own a business say, and you live in a small community, and there’s a small community newspaper, you could put an ad in there and you can use your child as the model for that ad. And you just pay them whatever the prevailing rate is in your market area for models, and that’s earned income. You need to keep the records and you need to do all that kind of stuff, but that’s legitimate income.
Steve Pomeranz: You know down here in South Florida, you’re in Rochester, I’m sure it’s the same thing, but there’s a lot of commercials with plumbers or small businesses that sell carpeting or something like that, and they have their two kids saying, “Come to dad’s store, he’ll treat you best,” or whatever. And you wonder the kids don’t ever seem to take any acting lessons or anything. But I guess you could start an IRA, a child IRA for his kids if they do that. It’s a good idea.
Chris Carosa: He could, if he pays them. A lot of these owners don’t think to pay their kids, and they lose that opportunity.
Steve Pomeranz: I see.
Chris Carosa: In my book, From Cradle to Retirement, I interview a couple of dozen people who’ve actually done this. And very few of them own their own business and use the children for their own business. In fact, the first interview hasn’t even made it to press yet. I have a site called childira.com, where I just collect these stories of people who are actually using it.
And I finally interviewed someone who used their grandchild for a commercial in the late ‘90s. This is going way back now. And that’s cool, and she’s now an adult, she’s a teacher. And I’ve interviewed her and I’ve interviewed the grandfather and the mother and the aunts. And the entire family. By the way, they’re also in the financial services industry, which by coincidence is where most of these people seem to be.
Steve Pomeranz: Okay, sure, that makes sense.
Chris Carosa: Yeah, because they know the rules. But there are people whose kids have started their own business, say, and whose parents were wise enough to encourage their kids to put money into an IRA. And they’ve saved it, and now they’re adults, and they want to do the same thing for their kids.
Steve Pomeranz: Yes, so I want to get into some of the weeds here because this is pretty interesting. This idea of starting really early, this child IRA. Let’s say you follow this model and somehow you can get your kid to model at three-months-old or something. If you were to put away a small amount of money, let’s say $20 a week or $80 a month or $1,000 a year, and you were to do that until age 19, so $1,000 a year to age 19, and then just stop.
This is what is fascinating about this whole concept. So, you put no more money in other than that $19,000. You get a market rate of return, which in your calculation let’s say is 8%, but historically, over many years, it’s higher than that. What are the results, Chris, of me putting away this $1,000 a year for 19 years?
Chris Carosa: Well, at 8%, which is two or three percent below the historic average, you end up with $2.25 million.
Steve Pomeranz: And this is by age what?
Chris Carosa: This is by age 70, which is probably when most babies are going to retire at this point.
Steve Pomeranz: Yeah, exactly.
Steve Pomeranz: Okay, so $2.5 million. But it’s not as if you’ve put money in your whole life. You’ve stopped at age 19. This is the miracle of compounding.
Chris Carosa: It is. I’ll tell you, the question that I get is, “Is it too late for me to do this?” I get that from a lot of people.
Steve Pomeranz: Well, because most kids aren’t working at three-months-old, they’re waiting until they’re a teenager. I think this is where you’re going with this?
Chris Carosa: This is exactly where I’m going because I got a new book that I’m working on, that should be out momentarily. Not momentarily, maybe within a month or so. It’s called a Parents Guide to Turning Your Teenager Into a Millionaire. And it’s based on the same concept. You contribute to an Ira when you’re a 13 and then stop at age 18.
And here now the difference is I’m allowing for the maximum contribution. The maximum contribution per year is $6,000. That’s not really that difficult for teenagers to earn over the course of the year, between working heavily in the summer and then part-time for the rest of the year.
Chris Carosa: You do that, you put it in for those six years, and then again, do nothing except do worse than the markets, two or three percent than what the market does on average.
Steve Pomeranz: Okay, let me set you up for this, hang on a second.
Chris Carosa: Sure.
Steve Pomeranz: So you put $36,000 away, $6,000 for six years.
Chris Carosa: Right.
Steve Pomeranz: And then you stop. And then at age 70 are we talking about still?
Chris Carosa: Age 70, yes.
Steve Pomeranz: All right, what’s it worth?
Chris Carosa: $2.5 million.
Steve Pomeranz: Okay, so that’s pretty good. That’s actually more realistic I would think.
Chris Carosa: That is, that’s why I’m doing this book because I think more people will find this book useful. And by the way, if you’re interested in the book, you can go to Child Ira, sign up for it, and I’ll let you know when it’s out.
Steve Pomeranz: Yeah, please do.
Chris Carosa: And I’m going to give people a deal on it. It’s going to be an ebook, so you’ll be able to access it right away. And the importance of that is we’re heading into the summer work season for teenagers, and this way they’ll be able to hop right on and get going.
Steve Pomeranz: You know, I want to stop for a second and talk about this compounding idea because the way it works is really fascinating. Chris, do you know the show “Who Wants to be a Millionaire?” The game show?
Chris Carosa: Of course, I do.
Steve Pomeranz: Okay. So if you think about that show, compounding is very much illustrated by the prizes. So you start off, I forget, 250 bucks, maybe you answer for the first question. And then it jumps to $500, and then it jumps to $1000. And then $2,500. So it’s slowly, you’re building up small amounts. And then maybe it goes to $5,000, $10,000, and at some point, it jumps to $50,000, then $100,000, then $250,000, $500,000 and $1 million.
So you picture a hockey stick, really most of the wealth comes at the end. That’s the key here, is holding on, putting it in a drawer somewhere, letting the market do its thing, and you’ll find that over a long period of time. But there’ll be years when it will be rather frustrating that you really don’t seem to make that much.
Chris Carosa: That’s right. Well, I’ll tell you something else that’s kind of fascinating about this. You and I, we can talk millions of dollars, maybe add a couple more zeros and then we’re talking about real money. But for a kid, $10 is a lot of money. I mean depending on the age, $10 or $100, something that an adult might sniff at, that’s nothing, don’t worry about that. But for a kid, it’s a lot of money. And what I found out when I interviewed these parents, and again the children who are now adults, the kids when they started the IRA weren’t that interested.
They really didn’t know what it was. As they got older, into their teenage years and they understood a little bit more about math and money, all of a sudden it captivated them. It was as if they were playing a video game, and they were accumulating this cash. Again, it’s only going to be thousands of dollars at this point, but still, to them that’s a lot of money. And that carries forward into their adult year, the sort of discipline, the self-reliance and self-constraint in terms of spending, and the excitement about seeing your investments grow.
Steve Pomeranz: So, it has other ancillary benefits as well, along the way. Good teaching tool, and again, it creates kind of a reality-based version of money for them, not something that’s just theoretical, but it’s actually real.
Steve Pomeranz: My guest is Chris Carosa, president of Carosa Stanton Asset Management, contributor to Forbes, and author of From Cradle to Retirement: The Child IRA. Hey Chris, thanks for taking a few moments to join us today.
Chris Carosa: Thank you very much, Steve.
Steve Pomeranz: To hear this interview and any other interview, if you have any other questions regarding this or any topic, give us a write, or give us a call. And go to our website, it’s stevepomeranz.com. And while you’re there, sign up for our weekly update to find out about our live events, and to also access all of the information that’s sitting in our website. That’s stevepomeranz.com.