Transcripts

"Kevin McCormally's Tax Tips"-IRA's for Almost All Ages

SUZANNE PRATT: The countdown is on to April 15, the Federal income tax filing deadline. If you haven't finished your taxes yet, it's time to get busy and we're here to help. In tonight's tax tips, Kevin McCormally of "Kiplinger's Personal Finance" looks at IRAs for kids and the retirement savers credits. KEVIN MCCORMALLY, EDITORIAL DIR., KIPLINGER'S PERSONAL FINANCE: This piece of tax advice might cost you money, but it may be the best investment you make this year. If you have children or grandchildren who had jobs in 2007-- teenagers flipping burgers or young adults a few years out of college-- consider helping them fund an IRA. As long as the child had income from a job, up to $4,000 can go into an IRA for 2007. It doesn't have to be the kid's own money, either. It's perfectly legal for parents or grandparents to fund the IRA or maybe agree to match the child's contributions dollar for dollar.

The only restriction is no more can go into the account than the child earned from working. What makes this such a great idea is the awesome power of compounding. A single $2,000 contribution for an 18-year-old will grow to nearly $87,000 by the time he's eligible for Social Security assuming an 8 percent annual return. And if you use a Roth IRA, it will all be tax-free in retirement. A 2007 contribution can be made as late as April 15.

And there's an added bonus for young adults-- men and women over 18 who aren't students and who are no longer claimed as dependents on their parents return. A special tax credit to encourage low-income workers to save for retirement can really pay off for those struggling to get their careers off the ground. The credit can range from 10 percent all the way to 50 percent of the amount contributed to the IRA. To see the potential, let's say your 25-year-old earned just $15,000 last year. If you give her $2,000 for an IRA, good ol' Uncle Sam will actually kick in half the money via a $1,000 retirement savers tax credit. I'm Kevin McCormally.