Teaching children about money management and investing at an early age can lay the foundation for financial independence and future success. In a recent episode of the Women & Money Podcast, renowned financial expert Suze Orman shared valuable advice with an 11-year-old listener, Hazel, who was seeking guidance on how to manage and invest her monthly allowance. Hazel had already demonstrated financial responsibility by saving $4,000 in her bank account and was considering starting a custodial Roth IRA at her parents’ suggestion. However, Hazel had concerns about the limitations of a Roth IRA and wanted more flexibility in using her money for future milestones, like purchasing a house.
Orman responded thoughtfully, offering a valuable opportunity for parents and young investors alike to consider the benefits of different financial accounts when it comes to setting long-term financial goals.
Hazel’s Question: Roth IRA or Something Else?
Hazel, who currently earns $24 per month from chores and plans to earn more money from babysitting, was exploring her investment options. She had accumulated a savings balance of $4,000 and was interested in investing but didn’t want the restrictions that a custodial Roth IRA might impose on her access to funds.
A custodial Roth IRA, while an excellent tool for long-term retirement savings, restricts access to funds until adulthood, specifically after the age of 59½, unless used for qualified purposes like buying a first home or paying for educational expenses. Hazel expressed her desire to have access to her money sooner, particularly to save for a home purchase.
In response to Hazel’s query, Suze Orman acknowledged her ambition and praised her for already thinking about her future financial goals. Orman went on to discuss a different investment strategy that might better suit Hazel’s objectives and provide the flexibility she was seeking.
The Case for a UGMA Account: Flexibility with a Long-Term Vision
Suze Orman suggested that Hazel consider opening a Uniform Gift to Minors Act (UGMA) account, which offers several advantages over a custodial Roth IRA in this situation. A UGMA account allows a minor to own securities, such as stocks or exchange-traded funds (ETFs), under the management of a parent or guardian. Once the minor reaches the age of majority (18 or 21, depending on the state), the assets in the UGMA account are transferred to their full control.
This option would provide Hazel with greater flexibility in accessing her funds earlier than a Roth IRA would allow. She could use the funds for life milestones, such as purchasing a house or funding other goals, once she comes of age.
Orman recommended that Hazel use her monthly $24 income to start investing consistently, even if it’s in small amounts at first. By doing so, she could take advantage of compound growth over time while learning the value of regular investing, an important financial habit to build.
UGMA Accounts vs. Roth IRAs: What’s the Difference?
To understand why Orman preferred the UGMA account in Hazel’s situation, it’s important to break down the key differences between a UGMA account and a custodial Roth IRA.
- UGMA Account: A UGMA account is a custodial account for minors, allowing them to own and manage investments in stocks, bonds, ETFs, or mutual funds. The account is controlled by a parent or guardian until the child reaches the age of majority. Once the child is an adult, they gain full control of the account. While UGMA accounts offer fewer tax benefits than Roth IRAs, they provide more flexibility in terms of access to the funds. The child can use the money for any purpose once they reach adulthood, without the restrictions associated with a Roth IRA.
- Custodial Roth IRA: A custodial Roth IRA is a retirement savings account for minors who earn income. Contributions to a Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free. However, the funds in a Roth IRA are generally inaccessible before the age of 59½, except in certain situations like buying a first home or paying for educational expenses. While a Roth IRA offers powerful tax advantages for long-term retirement savings, it is less flexible when it comes to accessing funds early.
For young investors like Hazel, the decision between a UGMA account and a Roth IRA ultimately depends on their goals and time horizon. If a child is looking to save for long-term goals, like retirement, a Roth IRA is an excellent option. However, if the goal is to invest for shorter-term milestones, such as buying a home or funding college, a UGMA account may provide greater flexibility.
The Importance of Early Investment and Financial Education
One of the key takeaways from Orman’s advice is the importance of starting to invest at a young age. By consistently contributing even small amounts to an investment account, Hazel can benefit from the power of compound interest and the potential for significant growth over time. Additionally, learning to invest early fosters important financial literacy that will serve Hazel well throughout her life.
Orman emphasized the value of consistency and discipline in investing, suggesting that even small monthly contributions could build a substantial investment portfolio over the years. For children like Hazel, financial education and a solid understanding of investment basics can set them up for future financial success.
Why Parents Should Get Involved
While Hazel made the decision to seek advice from Suze Orman, the role of her parents in guiding her financial decisions cannot be overlooked. By working with their child to open an account, whether it’s a UGMA or Roth IRA, parents can ensure that their child has access to the right tools for building wealth. Additionally, parents can help their children understand the different investment strategies and the importance of making informed financial decisions.
For parents looking to teach their children about money management, now is the perfect time to get involved and guide them toward setting financial goals that are realistic, achievable, and aligned with their future ambitions.
Conclusion: Empowering the Next Generation of Investors
Hazel’s question highlights a growing trend of young people taking an interest in money management and investing at an early age. By providing children with the right financial tools and teaching them about investing, parents can help empower the next generation to achieve their financial goals.
Whether it’s through a UGMA account, a custodial Roth IRA, or other investment vehicles, the key is to start early and be consistent. By building good financial habits early on, children can set themselves up for financial success well into adulthood.
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