Invest in an IRA Young

By Craig Rozelle

Families with a high net worth should encourage their high school and college age children to invest in an Individual Retirement Account (IRA). Individuals can make a deductible IRA contribution equal to the lesser of $4,000 or earned income for the tax year. In addition to the immediate deduction, starting an IRA at a young age will increase savings at retirement age dramatically. Parents can also use part of their annual $10,000 gift exclusion to fund the $4,000 contribution for the child if their working money is needed for living or education expenses. This is attractive because it enables the high net worth parents to remove assets from their taxable estate and ensures that the child will not be able to access the funds (without penalty) until age 59 1/2. Starting an IRA at the age of 18 instead of 25 will significantly increase the individuals’ wealth by the time they turn retirement age. Assuming an 8% annual increase in value, an IRA started at age 18 with yearly additions of $2,000 will be worth over $905,000 at age 65. If the account were opened at age 25, it would be worth only $518,000. The additional $14,000 in contributions results in additional savings of nearly $400,000.

Sources:
http://www.allbusiness.com/government/421643-1.html
http://frugaldad.com/2009/01/27/roth-ira-for-teenagers/
http://www.fundadvice.com/articles/misc/young-investors-how-to-be-better-than-your-parents.html