FINANCIAL HOUSEKEEPING | Help fund your child’s retirement
While most parents are worried about paying for college – and most kids are concerned with buying their first car – taking a much longer view can pay off big for the next generation.
Specifically, children can open individual retirement accounts (IRAs), either a traditional or a Roth account. The source of the contribution can come from parents or grandparents; the Internal Revenue Service does not worry about where the money comes from, so long as the child has earned income (excluding investment income).
The annual contribution can be up to $4,000, or the total amount of the earned income, if it’s below that level.
Some financial services firms don’t allow minors to open accounts, but a custodial IRA – which allows a parent or guardian to manage the money for the child – usually can be accommodated. The funds in the account belong to the child and must be turned over at the age of maturity, typically 18, although it can vary based on state laws.
SHORT COURSE | Risk
Risk is the measurable chance that something either loses or fails to gain in value. Every type of investment is accompanied by one or more types of risk; diversifying a portfolio also diversifies the risk. Here are the most common types of risk:
Market or principal risk: the chance that an investment will lose money.
Interest rate risk: the possibility that an investment yielding a fixed rate of return will lose value because of an increase in interest rates.
Inflation risk: the chance that rising inflation will eat away at the value of income or assets, or both.
Credit or default risk: the possibility that a borrower will not repay an obligation as promised.
Exchange risk: the chance of a loss from fluctuations in foreign currency exchange rates.
