How to make your teenager a millionaire!

Teen years not too early to consider IRAs
By MARSHALL LOEB
www.MarketWatch.com

New York - If your teenager has a paying job outside the home - as do 40% of high school students - it makes sense to put his or her earnings into a tax-advantaged retirement fund. This could pay off big later on.


Just as any other earner, a child is allowed to invest up to $4,000 of earnings every year in a regular Individual Retirement Account. That tax-deductible money is free of federal income taxes until it is withdrawn.

But an even smarter choice for your teen is to put the money into a Roth IRA. That money is taxed immediately, but no tax is due when it comes out.

"Since teenagers are usually in the lowest tax bracket, a non-deductible Roth IRA contribution won't increase their tax burden today. But it could save them five or even six figures in taxes when they retire," says Kevin McKinley, author of Make Your Kid a Millionaire : 11 Easy Ways Anyone Can Secure a Child's Financial Future

There's no minimum age for contributing to an Individual Retirement Account, or IRA. So as soon as your child has earnings from work, be it baby-sitting, helping at your office or mowing lawns, he or she can open an account. This is a great way to teach your child how to keep track of his or her earnings and how saving a little money now can mean a hefty payoff later.

"At a hypothetical annual return of 8%, four years of $4,000 Roth IRA contributions during high school ($16,000) could be worth over $750,000 when the child turns 65," says McKinley. "She would have to save $2,000 per year from age 22 to 65 ($86,000) to get roughly the same amount."

Of course, it's not always easy to get your teen to think about retirement, let alone persuade him or her to agree to save, rather than spend, their earnings. Many parents have success with matching their teen's contribution. So if your child only wants to contribute $1,000, you can also contribute $1,000, just as long as the total amount going into the account isn't more than your child's total yearly earnings