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When a disappointed Clark Griswold received his “Jelly of the Month Club” bonus in the classic yuletide film Christmas Vacation, Cousin Eddie was quick to quip it was “the gift that keeps on giving.”
Little did Clark know that Cousin Eddie was on to something—something too many parents (and grandparents) also overlook.
When it comes to the year-end giving, a good portion of American parents mimic Clark Griswold and use it for an immediate purchase. Perhaps it’s a gift for the whole family like Clark’s swimming pool, or a gift for the individual child. In either case, that gift ultimately evaporates forever. It quickly transforms into just another ordinary worldly good as soon as the excitement of its novelty wears off.
As a parent, how much better would you feel trading that temporary enthusiasm for a gift that promises to bear long-term fruits each and every year?
Sure, it may be boring (because it involves numbers and perhaps a little math), but it will teach your child on any number of different levels (because it involves numbers and perhaps a little math).
Face it. Buying gifts for today’s children isn’t as easy as it once was. With so much reliance on technology, a subject where the kids are the experts, who could blame you if you fear buying an out-of-date system. Relax. It could be worse. You might be buying a game for that out-of-date system your child replaced months ago with the earnings from his summer job.
To avoid this embarrassment, many parents and grandparents (and more distant relatives) often turn to simply stuffing cash (or checks or gift cards) into stockings hung by the chimney with care. Talk about boring! But at least you know the kids will convert it into toys that will generate that hoped-for excitement (for a day or two).
There’s a better way to gift that cash. Instead of loading your children’s stockings with cash, why not slip a financial statement down into those toes?
That’s right. Turn that cash into the magic of a Child IRA.
Yes, your child can have a Child IRA. To be eligible, however, your child does need to have earned income.
Here’s the twist you might not be thinking of: sure, your child could spend all those summer job earnings on the latest video game system, but those exact dollars aren’t required to go into a Child IRA. The money contributed to a Child IRA can come from any source.
That means parents, godparents, grandparents, aunts, uncles and even family friends and neighbors can contribute money to a Child IRA. Of course, the total amount contributed from all those sources cannot exceed the lesser of the child’s total employment earnings or $6,000.
While it’s not impossible for younger children to receive earned income, it’s more likely you’ll be doing this for your teenage children. That’s because state and federal child labor laws make it difficult (but not impossible) for employers to hire pre-teens.
It’s not that unusual for a teenager working full-time in the summer and part-time during the school year to exceed $6,000 in total annual earnings. If parents made a concerted effort, between themselves and other close family members, to pool all the teenager’s gifts into cash, it may not be difficult to meet this $6,000 annual IRA contribution cap.
And here’s the good news: the gifts can keep coming in up until April 15th, since that’s the deadline for contributing to the previous year’s IRA.
There’s even better news. If parents start a Child IRA for their thirteen-year-old and continue contributing the max of $6,000 a year until college beckons (i.e., through the child’s eighteenth year), there’s a special prize at the end of the rainbow when that child retires at age 70 (since that’s when today’s teenagers will probably retire).
With no further contributions once the child goes off to college and those contributions earning 8% per year (considerably less than the historic average of 11%), the value of that teenage Child IRA will grow to nearly two-and-a-half million dollars by age 70.
Even if you wait a year and start contributing to a Child IRA at age 14, it’s value at age 70 is still roughly two million dollars.
Either way, that’s an incredible boost to your child’s retirement.
Does giving the gift of a Child IRA still sound boring?
Parents and family members who do so will soon discover the wisdom of Cousin Eddie.
The Child IRA is truly the gift that keeps on giving.