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Children Investing for Retirement?
The Benefits of Starting (Really) Early |
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It has been said that it’s never too early to invest for a comfortable retirement. But just how early? While it’s certainly not on the short list of priorities for young children, beginning to invest even a small amount for retirement early on can really add up. That’s because it allows that money to reap the benefits of compounding for a longer period of time.
One opportunity that children have to invest for retirement is through a traditional IRA or a Roth IRA. Not only is this an easy way to start investing for retirement, the money will grow tax-deferred until it is withdrawn, which can further enhance the account’s return potential.
There’s no minimum age associated with contributing to an IRA. For the 2007 tax year, a minor can contribute up to their taxable income or $4,000, whichever is less. This income can take many forms, such as the money earned baby-sitting, doing odd jobs, or working at a part-time job. Any relative or family friend can make contributions to the account, as long as the total amount doesn’t exceed the child’s earned income.
To open a MainStay IRA for a minor, it must be set up as a custodial account and held by an adult as guardian. While the adult is authorized to perform transactions on the account, the minor is the registered owner for tax purposes.
The table below shows just how valuable getting a jump-start on investing for retirement
can be. In this hypothetical example, 10-year old Tim starts putting aside $500 a year in an IRA until the age of 25 and then stops making contributions. Over this time, he puts aside a total of $8,000. On the other hand, Sally doesn’t start making contributions until she is 46 and puts aside $4,000 a year until she reaches age 65. Over that time, her contributions total $80,000. In both cases, their account grows 8% a year. Despite the fact that Sally contributes 10 times as much as Tim, at age 65 her account is less than half the size of Tim’s account. This clearly illustrates the benefit of starting early and the power of compounding.
Talk to your financial advisor today about starting a long-term investment plan for your children.
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