Most children are not into saving for the future. But the current tax and investment benefits are worth considering. A few dollars invested at an early age can return large sums at retirement time.

The Roth IRA can be especially beneficial for young people because they will have many years of compounded earnings within the IRA, earnings which could go income-tax-free forever. And in many cases, the lack of a current tax deduction for the contribution results in little or no change in the child's current income tax.

Take this example. Sara is age 17 and earned $3,000 from her summer job. She is entitled to invest in an IRA up to the amount of her earnings or $5,000, whichever is less. If Sara made a single, one-year contribution of $3,000 to an IRA, her fund would grow to $49,000 by the time she's 65 years old, assuming a 6% annual return. Even if the return rate were only 4%, her IRA would still be worth almost $20,000. And that is for a single year's contribution. If she continued to invest $3,000 at 6% every year to age 65, she would have more than $750,000.

What if Sara waits until she is 25 years old to start her IRA? The accumulated dollars at age 65 would be about 60% of the above number. So, those first eight years could be worth a quarter of a million dollars at retirement.

If Sara spends her earnings, she can still benefit from an IRA. Since she had "earned" income, she is entitled to contribute to an IRA regardless of the source of the funds. If her mom and dad or grandma want to give Sara the money, it can be used to fund the IRA. Think of this possibility when you're trying to decide on birthday and holiday gifts for loved ones.

Young people should be encouraged to start investing at an early age. It is a great habit to get into, and it just might keep them from being among the 95% of retirees who require financial assistance from others when they retire.

For details or assistance with your financial concerns, give us a call.

© copyright 2009