Start your kids on the Roth road
If you're the parent or grandparent of a teenager, there's
probably an Xbox or cell phone on that gift list of theirs. But for the next birthday,
holiday or graduation, why not give them something they'll really
appreciate -- a Roth IRA.
OK, they'll appreciate it about as much as another
sweater, but years from now they'll be smiling.
"Anytime I have a chance
to mention it I do, if I know the child is working
and has earned income," says Robert Kuehl,
a Certified Financial Planner and director of
continuing education with H.C. Denison in Sheboygan,
Wis. "The earlier you start on a Roth,
Earned income is the key in qualifying for a Roth.
There is no age limit for an IRA, but not too many preteens have
jobs. Household chores don't count and neither does income from
investments. Generally, a child would have to be working part-time
for an employer who collected taxes and reported the earnings to
the IRS. Watch "Children as tax deductions"
There may be some exceptions, though. The IRS says
it looks at this issue on a case-by-case basis. A child, who, for
all intents and purposes, is self-employed every weekend mowing
lawns, shoveling snow or babysitting, may qualify if receipts and
records are maintained.
Now, suppose your 15-year-old
son earns $2,000 stocking shelves at the supermarket.
Xbox? IPod? A $700 mountain bike? Retirement
account? Well, let's just say he's not dreaming
about an IRA while he's slinging those cereal
boxes. Fortunately, there's no rule that says
it has to be his money that funds the account,
says Marc Freedman, president of Freedman Financial
in Peabody, Mass.
"What I'm finding is parents are using the Roth
as an incentive, a savings incentive. They're saying, 'You earn
$3,000 and I'll put $3,000 into an investment account for you.'"
If you're not in a position to match your kids' earnings,
perhaps you could start an account with $500, or convince them to
put a quarter of their earnings into the account.
Early birds retire first
When it comes to retirement funds, a Roth IRA offers the greatest
opportunity for growth because the money grows tax-free. Kids don't
need the deferred taxes feature of a traditional IRA because they're
probably not paying taxes.
Invest the Roth money in stocks, bonds or mutual funds
and never pay tax on the capital appreciation,
earnings, dividends or interest. If a child
socks away $10,000 between the ages of 15 and
20 and then never adds another penny, that $10,000,
assuming a very reasonable 8 percent return
per year, will balloon to more than $217,000
by age 60.
Roths for minors make up just a small percentage of
brokerage accounts, but a growing number of parents are asking about
"We're constantly in communication with clients
about the benefit of using that income in a Roth IRA," says
Tammy Virnig, principal of the retirement resource center at Vanguard.
"We try to help parents who are trying to help
their kids save. Many clients call us with the Roth already in mind.
I've had calls from godparents and grandparents saying, 'I don't
want to give another toy.'"
Updated: March 11, 2008