This was a holiday story but I got to it a little late. Nevertheless, the principles hold true -- and you still have time to make it work this year (for 2005). And maybe it will give you the right idea of what to do with some of that money you got for the holidays. :-)
Here's the idea: start an IRA for your child.
First, the details/benefits:
All you'll need is $250 — or less — by April 15.
Assuming your 18-year-old earns 7% a year, each $10 she invests now will be worth $240 in 47 years, when she turns 65.
Which to choose -- Roth IRA or a traditional IRA:
"Go with a Roth," says Ray Ferrara, a financial planner in Clearwater, Fla. A Roth won't give you a deduction for your contribution, but withdrawals are tax-free at retirement. A traditional IRA lets you, or in this case your child, deduct the contribution, but she'll later owe taxes on her withdrawals.
Now the restrictions/issues to consider:
Your child must have employment income to open an IRA. For tax year 2005, she may contribute $4,000 or her total taxable compensation, whichever is less.
Any compensation your child gets for her job needs to be reasonable, and she has to actually do the work. If you pay her the minimum wage to rake leaves or $7 an hour to babysit, that's fine. If you pay your toddler $4,000 a year as a personal bodyguard, the IRS might want to talk to you.
Finally, a recommendation on how to invest the money:Ideally, you should invest her IRA in a stock mutual fund. A simple solution would be a stock index fund, such as the Vanguard 500 Index fund.
My thoughts:
1. This is a GREAT IDEA. As I wrote the other day, using a method like this, getting rich is simpler than you think and it's the way to start on your first $1 million at age 16.
2. Kudos for index funds again! If you haven't read these index fund posts from me, they're worth a few minutes:
3. I plan to do this for my son and daughter. My only problem now -- get them a job where they can earn $4,000. Know of anything for 9-year-olds? ;-)
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