Looking for a gift that keeps on giving? How about an IRA? Although it might not be as hip as a new iPod, an IRA could be the smartest gift you’ve ever given. Buying an IRA for someone you care about is a great way to spark the habit of planning for retirement. At the very least, the money you put in will continue to compound.
An IRA makes a great present for an older student (in high school or college) because the earnings potential is enormous when an account is started early. Don’t you wish your IRA had an extra 10 or 15 years of compound interest behind it? You can only open an IRA for your child if he has a job, however. Contributions to an IRA cannot exceed the earned income of the owner. So, if your kid only makes $2,000 in a year, then that’s the maximum you can contribute to the IRA.
An IRA also makes a great gift for a spouse, and it will end up being a gift for you too. If you have maxed out your retirement contribution, you can still contribute to your husband's or wife’s IRA. It’ll seem really romantic when it turns out you can afford that trip to Paris in retirement.
It’s easy to open an IRA in someone else’s name. You can ask your financial advisor to handle the paperwork, or you can visit a bank, credit union, savings and loan association or another financial institution. Some funds require a large initial contribution, but you can find funds that can be started with as little as $200.
When you open the IRA, you’ll have to choose between a traditional IRA and a Roth IRA. With a traditional IRA, taxes are paid on the back end, when the money is withdrawn. With a Roth IRA, withdrawals are essentially tax-free but contributions are made after tax. If the IRA is for your child, go with a Roth IRA. That way, your loved one will be able to take withdrawals of original contributions without taxes or penalty (earnings can only be withdrawn without taxes after age 59 and a half). Of course, it’s best if the account is allowed to grow untouched until retirement, but it’s nice to have the option. And keep in mind, your kid probably doesn’t make enough money to see any tax savings from a traditional IRA.
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