Most children are not into saving for the future. But the
current tax and investment benefits are worth considering. A few
dollars invested at an early age can return large sums at
retirement time.
The Roth IRA can be especially beneficial for young people
because they will have many years of compounded earnings within the
IRA, earnings which could go untaxed forever. And in many cases,
the lack of a current tax deduction for the contribution results in
little or no change in the child’s current income tax.
Most children are not into saving for the future. But the current tax and investment benefits are worth considering. A few dollars invested at an early age can return large sums at retirement time.
The Roth IRA can be especially beneficial for young people because they will have many years of compounded earnings within the IRA, earnings which could go untaxed forever. And in many cases, the lack of a current tax deduction for the contribution results in little or no change in the child’s current income tax.
Take this example. Sara is 17 years old and earned $3,500 from her summer job. She is entitled to invest up to $3,000 in an IRA. That single, one-year contribution will grow tax-free in an IRA. By age 65, Sara’s one-time $3,000 investment will grow to $49,000 with a 6-percent annual return. Even if the return rate were only 4 percent, her IRA would still be worth almost $20,000. And that is for a single year’s contribution. If she continued to invest $3,000 at 6 percent every year to age 65, she would have more than $750,000.
What if Sara waits until she is 25 years old to start her IRA? The accumulated dollars at age 65 would be about 60 percent of the above number. So, those first eight years could be worth a quarter of a million dollars at retirement.
If Sara spends her earnings, she can still benefit from an IRA. Since she had “earned” income, she is entitled to contribute to an IRA regardless of the source of the funds. If mom and dad or grandma want to give Sara the money, it can be used to fund the IRA.
Young people should be encouraged to start investing at an early age. It is a great habit to get into and it just might keep them from being among the 95 percent of retirees who require assistance from others when they retire.
Doug Herring is a CPA with the accounting and business consulting firm of Bianchi, Lorincz & Company located in downtown Hollister.
