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Roth IRAs for Kids

Posted by Cheryl Costa  July 1, 2009 09:31 AM

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Does your child have a job this summer? If yes, you might want to talk with them about the advantages of a Roth IRA and encourage them to open an account and make a contribution. In order to make a contribution, the child must have earned income. In 2009, contributions up to $5,000 are permitted for individuals under the age of 50.

If you think it would be difficult to persuade a teenager to make a Roth contribution, consider these facts: if a 16 year old made a single $5,000 deposit into a Roth this year, that contribution would grow to over $217,000 by the time the child turned 65 (assuming an 8 percent return).

And, one of the big advantages of a Roth (versus a traditional IRA) is that no distributions are required. However, if distributions were voluntarily taken at age 65 and continued through age 82, the total amount distributed would be over $450,000. And all of that amount would be tax free -- not bad for a single $5,000 investment. Even most teenagers can appreciate numbers like those.

If your teenage worker is less than excited about contributing all of their wages to a "retirement" account, you should know that you can make the contribution for them. The only "catch" is that it counts against the $13,000 annual gift tax exclusion amount (married couples can gift up to $26,000). Finally, don't forget that Roths are not just for retirement -- contributions can be withdrawn any time.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

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D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
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