today’s finance: imposing an IRA on a teenager

According to someone at investopedia.com, people other than me think that setting a child up with a retirement account is not a terrible idea designed to torture young Americans with delayed-gratification challenges. But most of these people assert that the Roth IRA is the right choice because, apparently, only rich people are going to get retirement accounts at birth.

It is very, very possible that all of my children will be billionaires but I chose the traditional IRA for a child because of my working-class background which leaves me with “too much” respect for The New Deal. And, speaking of billionaire Peter Thiel of the PayPal Mafia, we currently have the option to convert a traditional IRA to a Roth IRA. Here is one motivation behind such a move:

The government has restrictions on Roth IRA accounts—namely, you can only put in a certain amount of money every year (for 2021, it’s $6,000). There are also, theoretically, restrictions on who can use a Roth IRA. If you make more than $140,000, you are not supposed to be able to contribute to a Roth IRA. There is a loophole around this called the “Backdoor Roth,” which is widely practiced, codified into law, and is the subject of hundreds of podcast episodes and articles. To do this, you basically open a regular IRA and then “convert” it into a Roth IRA, which somehow magically bypasses the income restrictions.

But before we get into $140,000/year problems let us get back to basics: why would a Dad impose an IRA on a kid?

the reasons for the traditional IRA

The human brain does not finish developing until age 25. Handing a delicate instrument like a retirement account over to a child seems almost cruel. Now I am not an expert on the psychology but I have heard, secondhand from one or two therapists that I am a “cold technician” and, because I was a “gifted” child, I expect my children to be just as excellent as I was at an early age. It follows that a “normal” child can suffer greatly under these expectations of excellence.

Somehow (as of this writing), my youngest child is about to turn 18 years of age. My youngest apparently has survived my “cruelty”—and, now, I ‘reward’ her with more cruelty:

I expect her to form a relationship with the capitalist world by taking the offensive, first by understanding that fiat currency decreases in value and steps must be taken to defend against this (simply saving money is not enough).
I expect her to form a mature relationship with her financial self with a bias toward value investing which depends on something my father would call longsuffering.
In the same way that Warren Buffet got to know See’s Candies before investing, I expect my daughter to at least understand that large organizations can be researched and investigated like individual people can—and she has the right to investigate.
I expect her to learn about avoiding borrowing money from herself as she inevitably borrows money from herself—which sounds crazy (see “the family mechanics of a traditional IRA” below).
I expect her to discover that the shadow side of American youth culture lies in borrowing too heavily against future income, based on a distorted view of mortality.
I expect her to control her own definition of having “no money”—such that her definition of having “no money” is not identical to a 1980s, crack-addict definition of having “no money.”
I expect her to defend herself proactively against being terminated with a 401(k) employee benefit.

To stereotypical middle class folks from success-oriented families, it may seem insane to see a terminated employee with a 401(k) benefit simply take the penalty and cash it out instead of rolling it over—no matter how “small” the balance of the 401(k) is. I have lived long enough to see this insanity (from others) and to report that the leading source of income driving the balance of my 401(k) higher have been rollovers due to termination of employment. My children may have a political understanding of why their Black father has been terminated so frequently but may not know that I have been defending myself financially as much as possible in spite of the politics.

initial IRA investments

Jonathan Ping of MyMoneyBlog.com, specifically his portfolio income updates like His 2021 update, can be used guidelines to focus on broad, sweeping investments:

name	symbol	remarks
Vanguard Total Stock Market Fund	VTI	This is an ETF. Shares are above US $200.
Vanguard Total International Stock Market Fund	VXUS	This is an ETF.
Vanguard Intermediate-Term Treasury ETF	VGIT	This is an ETF.
Vanguard Short-Term Inflation-Protected Securities ETF	VTIP	This is an ETF.

First, we notice from the names of these investments that Jonathan is attempting to:

invest in the entire U.S. stock market
invest in the entire non-U.S. stock market
invest in U.S. treasuries (making the U.S. owe you money)
invest in securities protected by inflation

These investments are speculation which is another way to say gambling. But these are the most conservative bets possible as long as capitalism persists. These investments very strongly suggest that investing in individual stocks is more risky and definitely too risky for a teenager who is being introduced to financial markets for the first time.

Next, we notice the name Vanguard which is a reference to The Vanguard Group:

Founder and former chairman John C. Bogle is credited with the creation of the first index fund available to individual investors and was a proponent and major enabler of low-cost investing by individuals. Vanguard is owned by the funds managed by the company and is therefore owned by its customers.

The index fund is the instrument used to invest in these swaths of concern. An index fund can be a traditional mutual fund or this relatively new thing called an ETF or Exchange-traded Fund. According to The Motley Fool, one of the earliest proponents of index funds on the Internet:

Because of transaction costs, ETFs don’t work well for dollar-cost averaging and, also don’t tend to be available through 401(k) plans. However, you can avert some of the fee bleed by using an ultra low-cost discount broker (though you will sacrifice some in service).

As a dad, I am an old guy (from the 1980s Los Angeles working class) and I have a bias against ETFs which made me translate (or postpone) Jonathan’s positions above into ones more comfortable (historical) to me:

name	symbol	socially responsible?	remarks
SCHWAB 1000 INDEX FUND	SNXFX	no	This is a no-load, no-fee mutual fund. The investment seeks to match the total return of the Schwab 1000 Index®. Shares are about half the cost of VTI.
Vanguard European Stock Index Fund Admiral Shares	VEUSX	no	Uses an index that measures the investment return of stocks issued by companies located in the major markets of Europe. The initial investment cost has gone up to US$3000!
Green Century Balanced Fund	GCBLX	yes	This is a no-load, no-fee mutual fund. The fund invests primarily in the stocks and bonds of environmentally responsible and sustainable U.S. companies… Initial investment: US$100.
Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares	VTIP	no	This is an ETF.

My listing of GCBLX allows me to introduce the virtue-signalling of socially responsible investing. Every year there should be a list of socially responsible funds—but we must look at the holdings of these funds. Many of the holdings are the same glamourous names: Apple, Microsoft, Tesla, etc. One fund stands out for me, the Shelton Green Alpha Fund [NEXTX], as it holds names I’ve never seen before…

Another advantage of investing in GCBLX which should be exciting for most American teens with a smartphone and a wandering eye for electric cars is the ability to invest in Apple, Microsoft, Tesla, etc. simultaneously and at a lower cost. Looking at what I have written here, I see GCBLX and VTIP as a great start for teenager because it allows them to hold on to stocks (equities) and bonds (securities) at a low cost while feeling halfway socially responsible and 1000% American!

the family mechanics of a traditional IRA

I assume that my teen will have a traditional IRA with this very important feature: the ability to roll-over funds to a qualifying account within 60 days, every 12 months. For a working-class person, this is effectively a 60-day, emergency loan taken out against future income. For most of my late 20s and throughout (sadly) my 30s I used this ‘loan’ option frequently. As of this writing, I have never had to pay the penalty of premature withdrawal. I treated this ‘loan’ option like a wealthy but frugal family member from which I could borrow money but I had to seriously and respectfully pay this person back. This borrowing money from my future self was financial act of self-respect (and time travel?).

I was able to pay myself back because I was employed—and I assume that my teen, turning into a collegiate 20-something, will not be employed for some time. It follows that I would recommend these levels of escalation before resorting to the 60-day, emergency loan:

stay within the confines of student financial aid or family-issued allowance (funds outside the IRA)
conduct creative-but-legal fund raising efforts
reduce expenses (while keeping dietary requirements fully met)

Once the 60-day, emergency loan is taken (and my child has informed me in a timely manner), I have a 60-day buffer to figure out how to help (in addition to the help already in place). This 60-day buffer is a relative relief and is far cry away from the family member appearing suddenly with an emergency requiring immediate response. Any person that continually requires you to move substantial amounts of money around has effectively become your financial advisor. Let’s not make amateurs advisors.

The following “mean-dad” statement is very important to any child of mine who got an IRA from me: should you cash out the IRA, you are effectively saying that you no longer need to have a financial relationship with your father. The destruction of the IRA demolishes the 60-day buffer I set up for myself (you see how “selfish” that is, kid?). Unless you are renouncing the world as a Buddhist recluse, it is a financial way you can respect me. To destroy the IRA either means your world is truly and verifiably coming to an end or you are disrespecting me. As your father, I can help you understand what to do when someone close to you is disrespecting you. I would rather talk to you in theory about this than actually have you experience this in real life. To destroy the IRA is effectively disowning me, kid. It would be better to abandon the IRA in place, rather than seek out short-term gratification with a few bucks.

On the other wonderful hand, my children can compliment their IRA using the PayPal mafia techniques mentioned above and/or through something called a Solo 401(k). A child of mine moving to a Solo 401(k) means they are not “employed”—unless they are the employee of their own corporation! In this wonderful case, you have exceeded your father! I would be so proud!

explicitly informing a teenager that they are born into a capitalist society

Presenting an 18-year-old with an IRA is a rite of passage into the world of capitalism. The teen should learn quickly that actually being a capitalist is different from having capitalist sentiment. Actually being a capitalist means actually holding an item that increases in financial value. How one feels about items increasing in financial value is relatively irrelevant. As a parent, I would rather have children who are more sentimental about socialism while being clearly capitalist according to their financial records. I call this the Pink Floyd problem—and all of my children deserve to have this posh problem.

thanking my youngest child’s mother for respecting my basic human rights

Had the separation between myself and my youngest child’s mother ended with deference to the typical, family-law, colonial authorities, I, as a father under the control of the state, would very likely not be in a position to “wreck” my child’s life with my “crazy” financial ideas (my use of quotes here are directed away from the mother of my youngest child and toward the worlds of ideas of my other children). I am very grateful that our child was not victimized to the point of fragrant dysfunction by adult children posing as her parents, recovering from their broken-home childhood—at the expense of their children.

And my children must know that their grandmother—my mother—would not be impressed by any of the people who had any direct control/influence over the education and identity-formation of any of my children. According to my deceased mother, we have all done a less than excellent job as caretakers of children. Instead of simply ignoring the outburst lodged in this paragraph, I pray that my children will expand their consciousness and at least understand how other people can think quite differently than the folks enmeshed in their formative years.