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  WINDY CITY TIMES

Investments build children's financial future
Special to the online edition of Windy City Times
by James E. Elvord and RBC Wealth Management
2013-10-16

This article shared 2214 times since Wed Oct 16, 2013
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Have a child who is earning money from a part-time job like bagging groceries or serving fast food? You could make his or her financial future stronger than you might imagine by taking advantage of a tax-free retirement vehicle that likely didn't exist when you were your child's age.

It's the Roth IRA, the variation on the traditional IRA ( Individual Retirement Account ), and increasingly parents are realizing what a potential bonanza it can be for their kids. The trick might be persuading your child to buy into the concept of delayed gratification, but we have some suggestions working around that issue.

But first, let's look at the basics. Both the Roth IRA and traditional IRA allow individuals to contribute money they have earned ( not investment income ) to an account that isn't taxed as it grows. The tax-free period of growth can result in a serious accumulation of money decades later. Both IRAs have a limit on how much you can contribute annually ( $5,000 in 2012, $5,500 in 2013 for those under 50 ).

The difference between the traditional IRA and the Roth IRA is that the traditional IRA allows an individual to avoid income taxes on the contributed amount on the year it is earned in return for paying taxes when money is withdrawn ( permitted at at 59˝ ).The Roth IRA doesn't allow the initial tax deduction when the money is earned, but in turn the government doesn't tax withdrawn amounts ( again, permitted at 59˝ ).

So you see why the Roth IRA is better for a minor, right? A 15-year-old earning $2,000 a year isn't looking for ways to reduce her tax bill — the amount is too low to incur any ( except for payroll taxes such as Social Security and Medicare. ) What the 15-year-old wants ( although she may not know it at the time ) is the big wad of moolah she'll have waiting for her when it's time to retire.

Say your 15-year-old puts $1,000 into a Roth IRA each year for five years. Assuming a rate of return of 8% ( not out of line with what stocks historically have returned ), that initial $5,000 will be worth $250,000 when your teen turns 65. Share that example with your child — that should spark some interest!

Suppose your child says, "Sounds great, but I really need some new clothes right now, so I'll pass." You could make a deal with your child — you'll put in $500 of the $1,000. She can use the other $500 on the clothes. Legal? Yes — with some limits.

First, between you and your child, you can't contribute more than your child has earned. So if your child earns, say, $2,500 in 2013, that's the max you can put into the IRA account, even if you're willing to add more because you're such a nice parent. Second, the limit of $5,000 in 2012 and $5,500 in 2013 applies to both IRA forms. You can't put $5,500 in each ( although you could divide the total between them if you wanted to do so. )

Third, the money has to be for real work. Don't try to pay your child $50 for taking the dog for a walk or $1 for smiling at you in the morning as a way of giving the child some income. It's probably best if the money comes from a third party, like the grocery store or fast-food joint or movie theatre. If you hire your computer-geek son to revise the website of the small business you own, that might qualify, but only if you pay a market rate.

One additional benefit of an IRA: It will not be counted as an asset if and when your child applies for financial aid for college.

There are a couple of reasons to forego the IRA options. First, very small contributions may not be worth it because the fees involved in setting up and maintaining the Roth IRA account may eat up too much of the contributed amount. Second, remember that the money is available to the child once he or she reaches legal age, so if you aren't confident your child will have the willpower to leave the money in the IRA at that point, you might want to consider some other avenue of benefiting them financially.

This article is provided by a Financial Advisor at RBC Wealth Management. The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance.

RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC


This article shared 2214 times since Wed Oct 16, 2013
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