Matching Kids’ Pay With IRA Deposits
Question: I have been helping my kids fund Roth IRAs since they were about 15. They are now 21 and 22 and in college. They don’t earn a lot, but I try to match what they earn and deposit it into their Roth IRAs. Do you think it is fair that I contribute more to one child’s account than to the other’s? One earns more (by choice).
Answer: Helping children fund their Roth IRAs early can be a great way to build future wealth because a $4,000 contribution today could be worth more than $125,000 when they reach retirement age (assuming an 8% average annual return, which is a reasonable assumption for a diversified portfolio of stocks, bonds and cash).
As you know, you can contribute to a child’s Roth only if the child has earned income, and you can’t contribute more than what the child earns in a year. Many parents believe that matching what each child earns is a fair way to go, and that’s probably the case if your lower-earning child is spending her free time playing video games or attending keggers rather than working. If your lower earner is choosing to volunteer or take unpaid internships, though, you might want to reconsider matching and instead make equal contributions to each. A child shouldn’t be penalized for using her time productively, even if she’s not maximizing her income in the short run.
You didn’t ask, but you also should be wary of any estate plan that distributes wealth unequally. Unless you have a child with special needs, unequal inheritances tend to create lasting bitterness and enmity among heirs. That probably isn’t the legacy you want to leave.
Follow 3 Basic Steps to Start Repairing Credit
Q: I had superb credit until I was forced to file for bankruptcy protection a few years ago while I was in a terrible divorce battle. I have since gotten a new car with an auto loan, but obtaining a credit card is impossible. How can I repair my credit without hiring another attorney?
A: Chances are you’re already in the process of repairing your credit, thanks to that auto loan. Paying an installment loan on time is typically a great way to boost a troubled credit score, the three-digit number lenders use to gauge your creditworthiness.
To do you any good, though, the loan must be reported to the three credit bureaus. Request your credit reports from all three, and check to make sure the loan is on them. If it’s not, you may want to ask the lender to update the account at the bureaus or consider refinancing the loan with a lender that will.
While you’ve got your reports, check to make sure your other accounts are accurately reported as well. All the debts that were erased in your bankruptcy case should have the notation that they were included in bankruptcy. If they’re still showing as open and unpaid, they could be hurting your score. Look for other important errors, such as negative information that’s older than seven years, and request that the bureaus delete them.
The final step in rebuilding your credit is getting a credit card. This task is far from impossible; you’ve just been asking for the wrong kind of card. Instead of an unsecured credit card, which doesn’t require a deposit, apply for a secured card, which does. Your credit limit will usually equal the amount of your deposit, which won’t be much -- $200 to $1,000, usually. Make sure you don’t charge more than about 30% of your limit each month, and pay off the balance. Look for a card with low fees. It will convert to an unsecured card after a year of on-time payments.
Once you’ve got those bases covered -- correcting your credit reports, obtaining an installment loan and getting a secured credit card -- you should see steady improvement in your scores if you continue to pay your bills on time and don’t max out your card. Good luck.
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Liz Pulliam Weston is the author of the new book “Deal With Your Debt: The Right Way to Manage Your Bills and Pay Off What You Owe.” Send questions to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or visit www.lizweston.com. Distributed by No More Red Inc.
