Free Money

Do it for the Kids


Okay Marcio, you wanted a surefire tip. Here goes.... For this to work you have to meet a few conditions:

You must have children.

They must be adults (ie. wage earning and paying taxes) and don't have an IRA.


You must be able to trust them.

You must have a modicum of discretionary income

What you do is loan each:

$2,000 at interest (say 10%)

Each immediately deposits it in an IRA account investing in a small cap mutual fund(s).

At tax time, each takes a $2,000 deduction entitling him to a refund on the taxes withheld on the $2,000 ($200-$500).

When he gets the refund he signs it over to you (to pay the interest to you).

You do that for 5 years ($10,000 in total loans)

For the next five years, he pays you back at the rate of $190 a month (works out around 5% interest for the five years)


Actual example: Two of my children took me up on this. One is starting his seventh year (2nd year of pay back) and has $18,000 in his IRA. Should he want to he could take the $8,000 out and pay me back right now and have a $7,500 balance (disregarding tax penalty consequences)THAT NEVER COST HIM A PENNY.

The other won't be starting her payback until next year but she already has nearly $14,000.

Other stuff:

  1. Small Cap funds have historically been the best investment over decades and that's what we're talking here.

  2. If the risk of mutual funds is too much for you, you could invest in either government bonds for a guaranteed, but most likely lesser, return (certainly in the last 20 years). You could increase that return by investing in Zero-coupon bonds.

  3. Each of the kids made me a trustee of his account so I could invest for them. Even more important I get a quarterly statement from the broker allowing me to keep track.

  4. My son would have had another maybe $1,000 -$2,000 in his account but he lost a $100 the first year by my trying "to beat the market" and move his money around between no load mutual funds for him. After the first year, I put it into a solid fund and not touch it.

  5. By the time my son has repaid me (in 3 1/2 years), he should have around $25,000 in his account. If he converted it to 7.5% long term bonds he would have around $250,000 at retirement.

    If the market goes really sour and there is only $10,000 in 3 1/2 years there will still be $100,000 at retirement.

  6. It doesn't have to be your child(ren) to qualify nor does it even have to be children. It's just the example I used.

Following are comments I have received that are also applicable to IRAs that you may want to look into:

I believe that the IRS code still allows the holder of an IRA to withdraw prior to age 59.5 without penalty if it is to be used for educational purposes.

I am positive it can be used for the 1st time purchase of a house. Have a great week ............... John

IRS provisions allow for up to $10,000 to be given per annum to reduce one's estate. If the Congress ups the IRS deduction, then the pie gets even sweeter.

End of IRA

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