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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 your gift list. But 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, the better."

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.

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 baby-sitting, 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 them.

Next: Fees can gobble up a small account.
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