By: A.J. Cook


Give your teenager a retirement gift. Yes, retirement. But don't expect thanks for awhile.

Give your child a Roth Individual Retirement Account. It's the hottest new savings device, because earnings left untouched for the requisite period avoid tax entirely. But it works only if the child has compensation income, like money from mowing lawns or doing other odd jobs.

Here's how it might work. John and Terri have an ambitious 15 year old son, Danny, who earns money working as a lifeguard. One summer he earns $2,000 and spends it, of course. His parents put that amount in his Roth account as a gift to him. The next summer Danny made the same amount ushering at a movie theater. His parents put in another $2,000. From those two summer contributions and an annual earnings rate of 7 percent, Danny can retire at age 65 with more than $100,000 tax-free. This means more than $96,000 escaped tax. With an 8 percent return, Danny could retire with over $160,000. These big numbers come from no taxes and interest compounding.

These are the rules for Danny's Roth:

Putting money in: The maximum contribution is limited to $2,000 or compensation income-whichever is less. For example, if he earned $1,400, the limit is this amount; if he earned $2,500, the limit is $2,000. Unlike a traditional IRA, the contribution is not deductible. But most teenagers don't need a deduction; their prime source of income is still dear old mom and dad.

Taking money out: Contributions can generally be withdrawn tax-and-penalty free anytime. Earnings, however, can be withdrawn after five years free of tax and without penalty if taken out after age 59½ or if used because of disability or to buy a first home. Imagine having tax-free money for that down payment.

The Roth is best for someone in a low tax bracket whose income will go up and who will hold the fund for a long time. A child fits the bill.

The Moral:  A rich child is a joy to his father (and mother).

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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This information is not intended for use without professional advise.
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Released 7-26-99