Junior IRA in a Nutshell

A JIRA (pronounced ji-rah) is merely an IRA for children that removes the work requirement. Here’s how it would work.

  • Once established by law, every newborn in the United States would leave the hospital with a birth certificate and a JIRA.
  • The newborn’s parents or guardians would have the authority to choose the JIRA’s custodian (Vanguard, Fidelity, Schwab, etc.).
  • The only eligible investment option for a JIRA would be a low-cost, total-stock-market index fund (Vanguard’s VTSMX fund, for instance).
  • The federal government and the birth state would each be required to contribute $1,000 to every newborn’s JIRA. Since there are roughly four million babies born in the United States every year, this feature would cost roughly $8 billion dollars annually (four billion from Uncle Sam and four billion from the states). Eight billion dollars is, of course, a lot of money. But in the context of what the feds and and the states currently spend (over $4.6 trillion annually), it’s pocket change.
  • The maximum contribution to a JIRA in the first year of a child’s life would be $3,000 ($2,000 from the government and $1,000 from other sources). The maximum contribution after the first year would be $1,000 annually.
  • Contributions to a JIRA could come from any source (parents, grandparents, aunts, uncles, charities, foundations, churches, etc.) and could not be used by the contributor for a tax deduction.
  • As soon as a child turned 18, her JIRA would immediately convert to a Roth IRA. 

Now suppose a child’s JIRA was fully funded by her family for 18 years. When this child turned 18, she would have at least $20,000 in her JIRA. If she added nothing to her JIRA-converted Roth IRA throughout her working life, how much money would she have in this account at 65? Assuming a return of 8 percent, she would have $744,640.17. If she contributed just $100 a month to her Roth IRA over her working life, she would have $1,331,598.83. If she contributed the current maximum to her Roth IRA every year until 65 ($5,500), she would have $3,434,847.58.

Objections

To me, the Junior IRA is a no-brainer. It would encourage saving and get the power of compound interest working for our children as soon as possible. But just because I think it’s a no-brainer doesn’t mean it is. Here are some major problems that would need to be addressed.

Inequality. Too many children in this country are born into poverty. And while having lots of poor children with JIRAs—and the $2,000 in taxpayer contributions that come with those accounts—is infinitely better than any wealth-creating tools currently available to poor children, JIRAs will not sit well with many people. Why? Simply put, wealthy families will be able to contribute to their children’s JIRAs and poor families won’t. JIRAs will exacerbate income inequality.

One way to mitigate this concern is to allow anyone or any institution to contribute to a poor child’s JIRA. Our public schools, for instance, could be a great source of JIRA contributions. Imagine a school board for a poor district. Every year it proposes two budgets. One with no JIRA contributions, and one with, say, a $250 JIRA contribution for each student. Both proposed budgets cost the same. The budget with JIRA contributions, though, contains some sacrifices. The average class size is increased by five students and most of the after school programs are cancelled. Would parents and taxpayers find these sacrifices tolerable? Maybe. Maybe not. The point is that once JIRAs become part of the equation, board members, teachers, parents, and taxpayers would be hard pressed not to weigh the value of JIRAs against their current spending priorities. My guess is that they will find maintaining the quality of their schools and making JIRA contributions are not mutually exclusive.

Fear of Wall Street. Wall Street does not have a pristine reputation. And rightly so. You repeatedly mistreat the public (Bernie Madoff, Enron, collateralized debt obligations, robo-signing foreclosures, high-frequency trading, 12b-1 fees, hostility to the fiduciary standard, etc.), and you forfeit all trust. JIRAs, then, can’t become a new way for the ravenous wolves of Wall Street to feast upon lambs.

To guard against this threat, I proposed a couple of investment restrictions for the JIRA that should keep the wolves at bay (see bullets two and three above). But children aren’t the only ones who need protection. Adults need protection too. So to keep JIRA-derived Roth IRAs less susceptible to the avarice of Wall Street, I propose the following investment restrictions for JIRA-derived Roth IRAs.

  • Only three types of funds can be part of a JIRA-derived Roth portfolio. A domestic total stock market fund, an international total stock market fund, and a domestic total bond market fund.
  • All funds purchased through a JIRA-derived Roth must be low-cost index funds or ETFs.
  • Finally, an age-based minimum bond allocation is required. Those forty and older must have at least 20 percent of their JIRA-derived Roth portfolio invested in the bond fund. Those fifty and older must have at least 30 percent. And those sixty and older must have at least 40 percent.

Anchor babies. We can’t be the world’s Department of Health and Human Services. In other words, we can’t afford to give $2,000 to every baby born to a non-citizen in this country. Failure to exclude anchor babies from the JIRA program would not only encourage more illegals to flout our immigration laws, it would completely undermine support for the program.

Those born before the advent of the JIRA. Suppose for a moment that Congress creates the JIRA and the program begins in 2017. Every newborn from that year forward would leave the hospital with a JIRA containing $2,000. But what about children born in 2016 or before? Giving $2,000 to every minor born before 2017 would probably be too costly. But every minor born prior to 2017 should be able to start a JIRA. And anyone who has a JIRA should be eligible for the maximum lifetime contribution of $18,000. So if a 16 year old gets a JIRA in 2017, her family’s contributions would not be limited to $2,000 ($1000 for 2017 and $1000 for 2018). Her family would also be allowed to make an additional $16,000 in “catch-up” contributions ($1,000 for every previous year in the child’s life). If she began her JIRA at six rather than sixteen, her family would be allowed to make $6,000 in catch-up contributions.

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