This month, my teenager will join the army of students finishing up the school year and reporting to summer jobs. They'll work as camp counselors, lifeguards, waitresses, stock boys and interns in all manner of businesses. My son's earnings, however, will be distinguished from those of his buddies, because $2,000 of that income will go into his Individual Retirement Account, bringing his savings, at age 17, to about $20,000.
My son has had an IRA since he was 10. The benefits of his 55-year investment horizon are remarkable. Assuming an 8% annual return, if he puts away $2,000 annually, he'll retire at age 65 with almost $2 million. That's a stupefying $1.4 million more than he would have if he had put off retirement saving until he was a mossy 25 years old.
My son was in a television commercial when he was 10, but such exotic good fortune is by no means necessary to begin securing the old age of your offspring.
My boy has worked as an HTML coder, he has done some office work for his self-employed mother and, at age 13, he designed a full-blown Web site for his grandmother's mastectomy boutique. And for all this he has been paid. Had he worked mowing neighbors' lawns and shoveling snowy driveways, he could have put that money into an IRA, too.
Yes, there is no minimum-age requirement for owning an IRA account. There is also no minimum amount you must put into an IRA annually. If your 14-year-old makes a couple of hundred dollars a year in tutoring income, or your 10-year-old has a $15-a-week paper route, you can and should open an IRA for your child.
Internal Revenue Service
does not distinguish between adults' IRAs and minors' IRAs, thus the same rules apply: The income must be earned (this excludes investment income and gifts), early withdrawals carry penalties, there's a $2,000 maximum on annual contributions, and the money can go into a traditional or a Roth IRA.
And, in the case of a child's Roth IRA, say hello to a free lunch, because the money that goes in is after-tax, and 50 years from now it comes out tax-free. That's because your child's annual income up to $4,400 is exempt from taxes, thanks to the standard deduction. Since most kids don't need the immediate tax deduction that a traditional IRA contribution provides, the Roth is usually a better deal.
In most cases, kids with IRAs should file their own tax returns. If no taxes were withheld on their earnings, they could owe self-employment tax if they grossed more than $433 during the year. Kids with Roth IRAs don't have to file tax returns as long as they earned less than $4,400, don't owe self-employment tax and don't have any investment income. In any case, parents can still claim their IRA-owning kids as deductions on their own returns as long as they're providing more than half of their children's support.
For parents who have their own businesses, the news gets even better. When you hire your child, the money you squirrel away into an IRA for him or her is a deductible business expense for you. But don't overpay your child or you could get into trouble with the IRS.
A child's chances of an audit are no different from anyone else's, so you or your child should keep careful records of the hours worked and amounts earned. Don't expect to pay your kid $2,000 a year for washing the dishes after Thanksgiving dinner and get away with it.
Many brokerages and banks don't even know the kid-IRA option exists (nor do many accountants), so you may have to shop around to find a financial institution that will take on a "custodial IRA."
is in the Vanguard. It pursues kid-IRAs and
promotes the fact that it accepts them.
also makes a pitch for kid-IRAs on its
While it's necessary for a parent or other adult to be the legal guardian of such an account until the child is no longer a minor, it is held under the child's Social Security number and is truly the child's own money.
That is one of just two blips on the rosy horizon of the kid IRA: Once your child reaches the age of majority, if he or she chooses to empty out that retirement account and take a trip to Vegas, there's nothing a parent can do to prevent it, legally speaking.
The other glitch is that a child's IRA savings could reduce his or her chances of qualifying for college financial aid. While it's unlikely this would happen in the case of a modest IRA like my son's, a child who put IRA funds into a couple of hundred shares of
at $5 and sold them a year and a half later for $200, could expect to take a hit.
All parents should have problems like this to worry about.
Ingrid DuBois's finance articles have appeared in Investor's Business Daily, Online Investor, The New York Times and elsewhere.