Transcripts

"Kevin McCormally's Tax Tips"-Getting Kids Into Investing

SUSIE GHARIB: We wrap up our series of year-end tax tips tonight with a suggestion that could help you and your kids. Here's our tax expert Kevin McCormally, editorial director of "Kiplinger's Personal Finance."

KEVIN MCCORMALLY, EDITORIAL DIR., "KIPLINGER'S PERSONAL FINANCE": If you have teenagers in the room, please shoo them away for a minute. I want to give you a suggestion for a great holiday gift surprise. How would you like to give your son or daughter or grandchild a gift worth over $100,000? Too extravagant for you? What if I told you you could do it for only $1,000? Now, I don't have a hot stock tip. I've got a sure thing.

Why don't you fund an IRA for your child? For this to work, the child must have had a job this year, because only people with earned income can contribute to an IRA. If your teen made money delivering papers or working retail or designing web sites, he or she qualifies. And there's nothing in the rules that says the child's own money has to go into the tax shelter. It's fine with the IRS if you give your son or daughter the cash, as long as no more goes into the account than the child earned.

Let's assume you give your 15-year-old daughter $1,000 to fund an IRA. If the money grows at an annual average rate of 10 percent -- and that's less than the long-term average return for stocks -- that $1,000 will grow to $117,000 by the time today's teen turns 65. Even with 3 percent inflation, that will still be worth about $27,000 of today's dollars, all from that $1,000 seed. And if you choose a Roth IRA -- which I think you should -- the full amount will be tax free. Now some IRA sponsors will tell you a minor can't have an IRA. Don't believe it. Plenty of banks, mutual funds and brokers are happy to open IRAs for youngsters. In addition to setting your kids on the road to retirement security, the gift of an IRA can also help pique their interest in investing and in tax planning. That's a great gift. I'm Kevin McCormally.