Nobody From Nowhere (@i8dc)

Occasional Common Sense

Great Idea if You Can Afford It: Establish a Roth IRA for Your Kids

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From William Baldwin via Forbes:

A youngster can put up to $5,000 a year in a tax-sheltered retirement account, but can fund it only with dollars earned working. You can help out with the dollars, but the child has to work in a real job… If your daughter earns $4,000 as a lifeguard, you let her spend that money as she normally would.  You come up with the $4,000 to put in the retirement account…

For a middle-aged worker the choice between a deductible IRA and a nondeductible Roth is a tough one to make. That’s because the deduction is worth a lot of money to someone in his peak earning years and therefore a high tax bracket. A 45-year-old worker has to weigh that benefit against the cost imposed at the other end: Every dollar coming out of a deductible IRA is taxable.  For a teenager working summers, the choice is not tough at all. For him, the up-front deduction [of a traditional IRA] is worthless. He’s probably in a 0% income tax bracket…

Assuming you can persuade your bank or mutual fund company to open the account at all (with you as guardian, if the child is under 18), you may have some minimum account hurdle to overcome. But note that you can combine two years of earnings in one deposit…

Make your children into savers when they are young. If they don’t break the habit, they will have more prosperity and less angst than most Americans.

One caveat: Colleague Janet Novack reminds me that you should think about how this move will affect college financial aid. While parents’ retirement accounts aren’t considered available to pay for college, the kids’ accounts generally are. In any event, an intergenerational gift almost never makes sense if it means starving the donor’s own retirement account.


Written by David Clayton

May 15, 2011 at 12:54 pm

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