IRAs for Your Children

So Junior has a paper route, you say? Sweet Pea is bagging groceries at the local supermarket? Well, then, I've got to ask you ... they've begun investing in a Roth IRA, right?

In case you weren't aware, minors can contribute to IRA accounts -- as long as they do so with earned income. A $500 birthday check from Uncle Lenny won't cut it.

This might seem a little ridiculous, to think of youngsters who make very little each year sacrificing a chunk of that pittance to retirement savings. But think again. If you're 45 now, you have about 20 or so years until you hit a typical retirement age. Money you invest now for that day will have 20 years to grow. If it does so at an annual average rate of 10% (the stock market's historic average), each dollar will become $6.73.

Meanwhile, if Junior socks away $1 at age 15 and it has 50 years to grow until he hits 65, that dollar will become $117! So a mere $500 invested in an IRA can turn into more than $58,000. If by age 20 Junior has managed to save $2,500, and it has 45 years to grow, it would become $182,000, growing at 10%. (If he manages to average 12% growth, it would become a whopping $410,000!)

I hope you're beginning to appreciate the power of time -- young people have much, much more of it than we do, and it's a powerful tool to make money grow.

It gets better
But wait -- there's more! If your kids invest in Roth IRAs, odds are they'll be able to withdraw their entire nest egg tax-free! That is, unless the current rules change, which could happen by the time they retire.

Finally, note that your children don't even need to be working for someone else. You can employ them yourself, and have them fund their IRAs from earnings they receive from you. This is a little trickier, though, and might raise some eyebrows at the IRS, so if you're going to do it, do it right. Make it real income for real work. File a Schedule H with your tax return and issue them W-2 forms. You might even need to apply for an employer tax ID number via form SS-4. If this sounds too complicated, look into that paper route.

Don't shortchange the power of an IRA. If you invest your money in it effectively, it can grow powerfully. With stocks like Tiffany (NYSE: TIF), General Dynamics (NYSE: GD), and Amgen (Nasdaq: AMGN) all having average annual returns above 15% over the past decade, that retirement money can grow quickly. And some successful stocks -- such as Yum! Brands (NYSE: YUM) -- might be household names to your kids and can help them learn about investing.

© 2007 Universal Press Syndicate.