Christmas 2006

IRA gift letter

By Kaye A. Thomas
Posted December 25, 2007

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First in a series.

As explained here, I've composed letters to accompany gifts that come in the form of contributions to Roth IRAs for our daughters, who are young adults. Here's the first one, for Christmas 2006.

 

This is Your Christmas Present

Really?

Actually, it’s only part of your Christmas present. The other part is the money I’m going to contribute to your new investment account.

Sounds boring.

Yeah, and it gets worse. You have to read this stupid thing.

What kind of account?

It’s a retirement savings account called a Roth IRA.

Does that mean I can’t use the money until retirement? That’s even more boring than I thought.

No, you can take the money out whenever you want. I hope you’ll leave it there to grow, but you can take it out if you want.

You mean I can take the money out right away?

Yes. This is a gift, so it’s yours to do with as you wish.

What’s the catch?

If you take the money out, you’ll have the money but you won’t have the account. Trust me, the day will come when you’ll be glad you have the account. But if you think you’d rather have the money now, you can take out some of it or all of it.

Why not just give me the money and let me decide whether I want to put it in an account like this?

I want you to have the account. If you take the money out of the account before you really need it, I want you to have the learning experience that comes when you realize you made a mistake.

What happens if I leave the money in the account?

You’ll have the learning experience of seeing the money grow and having it available when you need it. Actually, some years it might shrink, but in the long run it will grow, maybe something like 8% per year on average.

Still sounds boring.

In nine years it can double. Another nine, double again. And so on. You have a lot of years ahead of you, so it can double lots of times. If it doubles five times, you’ll have 32 times as much money.

That would take an incredibly long time, so it still sounds boring.

Humor me. If you leave the money in the account, there are other ways it might grow. I might add more in the future (not necessarily the same amount). Other people might add to it. Heaven forfend, even you might add to it. You might end up with some real money some day when you need it.

Why a Roth IRA?

They’re a good deal, especially for young people.

What else?

I really want you to learn a little about investing.

Boooring!

Yeah, but important.

Can you make it short? There’s something on TV . . .

Okay, for now just three things. Your account is invested mostly in stocks because that’s the kind of investment that grows the most over the long run, although you have to be prepared for the possibility it will go down some years.

I get it. Stocks go down sometimes, but up more than down in the long run. That’s one down, two to go.

For your account I chose an investment fund that has low expenses. Try to remember this: for investments, low expenses are important.

Okay, keep expenses low when investing. That’s two. Just one more?

Forget it. Two’s enough.

Then we’re done?

A few more details. First, you’re going to have to sign a form so we can get the account started. Also, there’s a rule that says you can’t contribute to this kind of account if you don’t have any earned income. As far as I know, you don’t have earned income for 2006, so we’ll have to wait until January to set up the account. And then, you’ll have to make sure you earn some money in 2007!

Are we done now?

Yes. I’m putting in $X to start the account plus $10 to cover the annual maintenance fee.

Thanks, I think.

That doesn’t count. You can’t thank me by reading something I wrote.

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