December 7, 2004  Email this  Print this
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A $100,000 Christmas Gift
by Kevin McCormally  How would you like to give your teenage son or daughter -- or grandson or granddaughter -- a Christmas gift worth over $100,000? Does that sound a bit extravagant?
What if it would only cost you $1,000?
No, we don't have a hot stock tip. Even better, we have a hot tax and retirement planning tip: Fund an IRA for your child or grandchild.
For this to work, the child must have had a job in 2004 because only people with earned income can contribute to an IRA. (Investment income doesn't count.) So, if your teen made money delivering papers, babysitting, flipping burgers, designing Web sites or working any after-school or weekend job, he or she qualifies.
And, there's nothing in the rules that says that the child's own money has to go into the individual retirement account. It's fine with the IRS if you give your son or daughter the cash. The key is that no more be contributed to the IRA than the worker earned on a job.
This year, individuals can put up to $3,000 into an IRA.
What about that $100,000 promise? Be patient because getting there relies on the power of long-term compounding.
Let's assume you give your 15-year-old daughter $1,000 to fund an IRA. If the money inside the account grows at an annual average rate of 10% -- and that is less than the long-term average return for stocks -- that $1,000 will grow to $117,000 by the time today's teen reaches her 65th birthday. (If the account averages 8%, it will grow to about $47,000 over the next 50 years.) If you choose a Roth IRA (which we think you should), the full amount will be tax-free when it's withdrawn in retirement.
In addition to setting your kids on the road to retirement security with the gift of an IRA, you also can help pique their interest in investing -- and tax planning, too. It's hard to think of a better gift this holiday season.
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