IRAs for Kids

If your child has earned income from outside the household, such as from a summer job or babysitting, consider opening an Individual Retirement Account (IRA) in your child's name. For 2009, you child can contribute $5,000 or his or her earned income, whichever is less, to an IRA.

Just how important is it to start an IRA for your child now? Suppose your 15-year-old daughter saves $800 from babysitting and purchases a Roth IRA. If she makes no additional contributions and the funds grow at 8% annually, the account will grow to over $37,000 by the time she reaches age 65, and withdrawals will be tax free. Or, suppose your son opens a Roth IRA with $2,000 at age 15 and makes annual deposits of $2,000 for the next 10 years. The value of his tax-free account at age 65 will reach about $700,000 if the annual growth rate is 8%.

Consider a traditional IRA or Roth IRA, for your child.