Kevin McCormally's Tax Tips: Readying Your Kids For Retirement
Monday, March 27, 2006SUSIE GHARIB: In tonight`s tax tips, helping your kids get a leg up on retirement. Here`s Kevin McCormally, editorial director of "Kiplinger`s Personal Finance."
KEVIN MCCORMALLY, EDITORIAL DIR., "KIPLINGER`S PERSONAL FINANCE": With the first baby boomers turning 60 this year, there`s no shortage of reports about how woefully unprepared we are for retirement. Social Security may be out of the headlines, but it`s not out of trouble. And companies can`t seem to freeze their pension plans fast enough. That makes this an appropriate time to talk about retirement securities for younger generations and what we Kiplinger`s call the kid IRA.
If your children had income from a job in 2005, they can put up to $4,000 in an IRA. Sure, they probably don`t think they can afford that and, frankly, they probably couldn`t care less. But no where is it written that a child`s own money has to go into the account. It`s perfectly legal for mom or dad or generous grandparents to fork over the cash or maybe agree to match contributions dollar for dollar. To see the potential, imagine this: $2,000 a year goes into an IRA from the time your son is 16 until he graduates from college at 22. Assuming no additional deposits, that account will grow to over half a million dollars by the time today`s teen is 65, assuming 8 percent annual return. If the account averages 10 percent, it will hold over $1.25 million. Even after inflation, that will have the buying power of close to $300,000 of today`s dollars, all from that $14,000 seed. And, in a Roth IRA., it`ll all be tax free.
Sure, some financial institutions will tell you that a minor can`t have an IRA. But that`s bunk. There`s no minimum age. The key is that a child have income from a job. Even if your child has already filed his or her 2005 return, there`s still time. The deadline for 2005 Roth contributions is April 17. They`re not even reported on the return. I`m Kevin McCormally.
