Roth IRAs for Kids

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 Finally, don't forget that Roths are not just for retirement -- contributions can be withdrawn any time.