HOW TO TURN YOUR KID INTO A FUTURE TYCOON
Penny jars and coin sorters are all well and good, but if you really want to jump-start your child's savings habit, you may want to think bigger. Think Roth IRA, in fact. Here are a few benefits of opening an account for your kids that could turn them into future tycoons. Doesn't sound too bad, now does it?
- •Hop in at any ageA child who has a job and earns income is just as eligible as an adult for a Roth IRA, which allows users to contribute after-tax money and receive tax-free growth and distributions.
- •Have control until your kids reach adulthoodFor minors, an adult has to open a custodial Roth account, with the adult as custodian and the child as owner, until the child reaches legal adulthood. Parents who set up an account within those limitations can start a child on the road to financial security without adding any worries about the tax man.
- •Teach your child an important lesson in personal finance"The two biggest things for hitting a savings goal are starting to save early and saving consistently," said Keith Bernhardt, vice president of retirement and college for Fidelity Investments. He said that after his son earned some money shoveling snow, he opened an account for him.
- •...And about how savings growTo illustrate how the savings could grow, Bernhardt demonstrated to his son what would happen with a 5 percent return in the short run, then over a 50-year time horizon. "His eyes lit up, and he said, 'Wow,'" Bernhardt recalled. Then his son began asking what would happen if he added to the account the following year.
- •Financial services are already making it easyFidelity earlier this month launched a Roth IRA for kids and other firms offer these accounts as well.
- •Accounts are even more useful for young saversMost minors have little in the way of earned income, which puts them in the lowest tax bracket. That makes Roth accounts even more useful for young savers, since their after-tax income — the amount they can deposit in a Roth — is typically so close to their gross income.