It’s never too early to start saving for retirement, right? This adage might be even truer than you think. Starting a retirement savings plan as soon as you get a "real job" is essential, but you can start even sooner. Even kids can start saving for retirement.
Opening an IRA for your child
In order to take advantage of the tax savings offered by Individual Retirement Accounts, or IRAs, your child must have eligible compensation, or earnings. Certainly, your newborn won’t qualify, but kids can earn money for working in a parent-owned business at any age. Just ensure they are actually doing some work, and that the compensation is reasonable for the task performed. Kids can also earn money for modeling, babysitting or a paper route.
The money that is invested in an IRA for your child does not need to come from the compensation he earns -- it can come from you. You can invest up to 100 percent of the child’s earnings or $5,000 per year, whichever is less. This money is invested before taxes are withheld, and the earnings grow tax-deferred. If your child is under the age of majority in your state, which is usually 18 to 21, you will probably have to open a guardian IRA. For a guardian IRA, the parent has to sign the paperwork to open the account and to authorize any withdrawals.
Other Savings Vehicles
A tax-advantaged, or qualified, retirement plan is an effective vehicle to save for retirement, but it isn’t the only one. You can open a savings or investment account for your child and deposit money to be held for his retirement even if he doesn’t have any income. You will not have the tax advantages of a so-called "qualified plan," but you can put money away. You might want to open a joint account in your name and the child’s in order to prevent your child from buying a fancy new car with the money once he reaches the age of majority.
Investing in Your Child's Future
Having your child start saving early for retirement gives him the advantage of a longer time frame for growth, but it also helps to instill good habits early. Include your child in the process of opening the account, and explain how the money is deposited and invested. In an age-appropriate way, show him how the investment earns money and how his savings grow. You will help create financial habits that could last him a lifetime.
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