Are your children or grandchildren working at summer jobs this year? Many high school and college students take a summer job to earn pocket money or save for next year’s college costs. A summer job can be a good thing for children — it helps instill a responsible work ethic and teaches them about the workplace.
But there’s another little-known benefit. If you can come up with the cash, you can use it to boost their lifetime savings. How? By giving them the encouragement and funds to open an IRA.
The eventual payoff can be huge. A single deposit of $3,000, compounded tax-free at 5%, amounts to over $34,000 in 50 years. That’s not an unreasonable time frame for a teenager. And if you invest in a Roth IRA, the money will be tax-free when they withdraw it in retirement.
As a general rule, anyone can open an IRA up to the amount of their taxable wages or self-employment earnings. There’s a cap of $4,000 for 2006. Because a student is usually in a low or zero tax bracket, a Roth IRA is usually a better choice than a traditional IRA.
The biggest hurdle is that your typical student doesn’t want to give up their earnings. At that age, next week’s purchases rank higher than retirement savings. That’s where you or an indulgent grandparent can help.
As long as the amount put into the IRA doesn’t exceed the child's wages, it doesn’t matter where the cash comes from. You could provide all the cash, or agree to match what the child saves. If you can afford it, it could be one of the best things you can do for your children.
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