Transcripts

Kevin McCormally's Tax Tips-Kid Size IRA's

SUSIE GHARIB: And this weekend is a great time to start planning your tax strategy for April. Wrapping up our series on year-end tax tips is Kevin McCormally, editorial director at Kiplinger's personal finance. Tonight, Kevin looks at the benefits of flexible spending accounts and IRA's for kids.

KEVIN MCCORMALLY, EDITORIAL DIRECTOR, KIPLINGER'S PERSONAL FINANCE: Let me close this series with two of my favorite year-end tax moves. If your employer offers a flexible spending account to pay medical bills, it's probably time to decide how much to set aside for 2009. Please, be aggressive, for your pocketbook's sake. Money you divert to a flex plan avoids Federal and state income taxes and Social Security and Medicare taxes, too. That can save you 35 percent or more compared with paying your medical bills with after-tax money. Sure, everyone knows about the notorious use it or lose it rule: the fact that if you don't spend flex money by a set deadline, you lose it. But the tax benefit of these plans is so powerful that you can forfeit a big chunk of the set-aside and still come out ahead. You don't want to forfeit a dime, of course, but don't shoot yourself in the foot by contributing too little. Finally, a tip for parents and grandparents. If you can afford it, consider helping your children or grandchildren fund an IRA. We know how difficult it is for young adults to set aside money for retirement. But the long-term power of compounding inside a tax shelter is just too awesome to ignore. Now, you know, a person has to have income from a job or self employment to have an IRA, but the amount that goes into the account can be a gift. Imagine that you give a struggling 20-something $2,500 for an IRA. Over the next 40 years, that could grow to over $50,000, if the investments earn 8 percent a year. And, if the market returns its historic long-term average of 10 percent, the account would hold over $110,000, all from your $2,500 seed. Better yet: if you choose a Roth IRA, it would be all be tax- free. What a gift that would be. I'm Kevin McCormally.