Ask Money

Money for a young daughter

Chris Farrell Nov 16, 2010

Question: My daughter was born on January 1st, 2010 and I was thinking about her financial future. I wanted to opened a Roth IRA for her and contribute $3000 a year to the Roth until she turns 18, then it would be my gift to her on graduation. Does the government allow this?

If not, what options do I have to make investments for her? I think the best gift I could give her is the time value of money. Would just opening a brokerage account be ok?

I look forward to your reply. Thank you, Aaron, Mansfield, MA

Answer: It’s wonderful that you want to set aside money for her and tap into the power of compounding. Albert Einstein called compound interest the “most powerful force in the universe.”

Now, you can’t open up a Roth IRA-or any IRA for that matter-without earned income. When she starts making money she can have a Roth.

In the meantime, you could buy her a good mutual fund, stocks, bonds and other investments. As you sugest, you would set up a custodial account for her.

There are two kinds of custodial accounts that go by the acronyms UGMA and UTMA. The initials stand for Uniform Gift to Minors Act and Uniform Transfer to Minors Act. In essence, the two accounts are similar although the rules are more flexible with the UTMA. Both accounts allow your child–a minor–to own securities. You–the adult–control the account, but the child owns the assets. You can’t take the money back or change your mind. It’s her money.

Over the years, I’ve taken a lot of calls from parents regretting setting up one of these accounts. The reason is usually the same: The realization that it’s truly the child’s money. You may have set it aside for college, but your child may want to buy a car with it or start a social networking site. You may not approve, but it’s their money to spend on what they want. But I think it works for most people.

It’s important for you to decide how you want to treat this money. If it’s hers when she is an adult and you’re fine with that, great. If not, maybe you should save the money in your name. Either way, when she gets older it’s important to discuss the account with her. Tell her why you set aside the money.Discuss your expectations. Listen to her ideas. Engage her in your finances and money expectations.

And congratulations for setting some money aside for her.

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