There are quite a few unusual things up here in Alaska. For instance, it is common to be chased by a moose while running at Kincaid Park. You can scoop salmon out of the Kenai river without a rod. And for five months out of the year, the sun barely peeks above the horizon.
The Permanent Fund Dividend
Another unusual thing about Alaska is that we receive a check from the state every year, called the PFD, or permanent fund dividend. The Alaska permanent fund was established in 1976. It was designed to serve as an investment where a certain percentage of oil revenue would be put into a dedicated fund for future generations who would no longer have oil as a revenue source.
The recent decline in oil prices has strained the solvency of the fund, but at this time, every resident of Alaska receives a yearly dividend (payout) from the fund. The payout changes every year, but averages somewhere around $1000. This year, on Thursday, October 5th, every resident of Alaska (including children) received a direct deposit of $1100 into their bank account.
Save your PFD!
Most Alaskans use this boon as an excuse to buy a big screen TV, the newest iPhone, or take a trip to a Hawaii. The weekend after the PFD is issued is often as frantic as Black Friday. However, in the original spirit of the permanent fund, I recommend that every Alaskan save this money for their own future.
Think about it.
If you had saved your personal PFD from the time you were born to the time you were 65 years old, assuming a payout of $1000 per year and a 4% real (after inflation) rate of return, you would have $300,000 dollars.
Similarly, if a family of four saved their $4000 yearly dividend from age 25 to 65, they would have $380,000. Not too shabby!
Alternatively, a college bound student who had saved their yearly $1000 PFD from birth to 18 years old would have $28,000 available for college spending, which just might allow them to graduate from college debt free. Parents, think about this for your kids!
Don’t be Normal
The next time you see that dividend enter your account, don’t even think about heading to Best Buy. Immediately invest it in your Roth IRA or similar retirement account. Your future freedom is at stake and it’s much cooler than the newest iPhone.
I love checking in on Alaska. Tonight I clicked over to ADN.com and read a story about how a black bear came into the post office and wouldn’t leave, so he got shot. Only in Alaska.
Then I see a picture of you paddleboarding in a wetsuit. With a hood.
At any rate, sorry about the economy up there right now. It sucks to see the PFD calculation changed this year.
Thanks for checking in. Yes, unfortunately Alaska’s unemployment rate is currently the highest in the nation at 6.6% (compared to the nationwide average of 4.3%). I’m very thankful that I’m in the 93.4%.
I am considering opening a Roth IRA for my 15 month old using the PFD “income”. As I understand the PFD is taxed as an income so it got me thinking that I could fund a Roth IRA for him. Would love to hear your thoughts on this subject.
Thanks,
(I have a 529 account started for him but the thought of being able to start his Roth which could compound for another ~58.5 years really gets my financial juices going. I feel like it could give him a big boost.)
Hi Beej. Unfortunately, according to the IRS, you are only allowed to contribute to a Roth IRA if you have EARNED income (wages, salary, or self-employment income). You are not able to contribute dividend income towards a Roth IRA. See this chart from the IRS for details. The White Coat Investor gets around this by “hiring” his kids as models for his website. I would recommend talking to a tax attorney and accountant if you pursue this strategy.
Even if you can’t start a Roth IRA, a taxable account (in addition to a 529) would be a reasonable option for your child. Although there would theoretically be taxes on realized capital gains and dividends every year, if you use a total stock market index fund and just hold it, there won’t be any realized capital gains, and the dividends will be taxed at 0% for many years until your child’s income surpasses $77,200 (in 2018, married filing jointly). Putting a small amount of money in an account at a very young age for your child can be very powerful. $10,000 in a taxable account at birth could grow to almost $250,000 at age 65 assuming an after-inflation, after tax return of 5%.