Should Your Kids Get an IRA to Play With?
BOSTON (MainStreet) -- The birth of a baby can lead parents to think about many things. That bundle of joy's old age is probably not among them.
Given the powerful nature of compounding interest -- which ideally can double retirement savings every seven years -- should parents be taking a greater role in securing their children's financial future, not just by building a college savings fund, but by funding an IRA that can multiply assets for a lifetime to come?
With people living longer and longer, the uncertainty of Social Security decades from now and the likely extinction of traditional pensions, future generations will need all the help they can get. A retirement plan that grows steadily as they age into adulthood could be exactly what they need to be secure and happy. Just $50 a month tucked aside in an IRA when a baby is born could grow to as much as $180,000 by the time they are 65 (assuming a 4% average rate of return).
Unfortunately, it's not quite that easy.A custodial IRA, established by a parent for their son or daughter, requires that the child have a source of income, at the very least a documented and taxable part-time job or summer employment, even if they will not be the one primarily funding it. Parents can try to count chore money and allowances as income, but the IRS could come knocking. Baby-sitting, lawn-mowing and snow-shoveling can count as income with documentation (so prepare to start handing out receipts to the neighbors). Proof of income "is the first thing we need to satisfy before we can even go down that road," says Brennan Miller, a specialist in family finance and financial consultant for Schwab's (SCHW) Northbrook, Ill., branch. "But if the child does have earned income, there is a tremendous opportunity. Whether you are young or old, time is an investor's and saver's best friend. If you have the ability to bank on that compounding growth over long periods of time, especially when we are talking about teenagers, they could have this money growing for them for 40 or 50 years before they think about retiring. That could really end up providing them significant assets."
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