Iras For Young Workers Could Yield Riches At 65

If your children are pulling in money from summer jobs, it’s a good time to look at how you can encourage saving through individual retirement accounts.

For people who have retirement plans at work, and thus, don’t get tax deductions on their IRA contributions, the chief advantage of IRAs is the way they postpone taxes on investment earnings until after retirement, keeping more money invested to compound over the years. The longer the money’s in the account, the more it compounds.

Usually, this is a pitch addressed to adults - a case for starting retirement savings plans early. If you invest in an $2,000 IRA that earns 8 percent a year at age 30, it will grow to $29,571 by the time you’re 65. The same contribution would reach only $9,322 if made at age 45.

But, what if you started when you were 15? In 50 years, $2,000 would grow to an astonishing $93,803.

Ideally, people would start investing even earlier, with parents opening retirement accounts for their children when they’re born. That’s not possible.

The reason: IRA contributions have to be made out of “earned” income. That precludes gifts from parents or grandparents, inheritances or income from trusts, or investments made in the child’s name.

But, a teen-ager who works in the summer or after school could easily earn enough to make a significant IRA contribution. The rules allow an individual to put up to 100 percent of earned income into an IRA.

Are you rolling your eyes yet? How can you convince Junior or Sis to bury that hard-earned money for 50 years and not buy a handful of compact discs or a nose ring? Well, there is a way.

You can’t put your own money into your child’s IRA, but there’s nothing in the rules to prevent you from replacing money that your child invests. If the kid earns $2,000 during the summer, he can put it all into an IRA, and you can write him a check for $2,000.

Suppose your children each started earning at least $2,000 a year, beginning at age 15. If your helped them put $2,000 a year into IRAs for seven years, until they earned enough to do it on their own, each of their $14,000 contributions would grow to $527,444 by the time they reach 65, assuming an 8 percent return.

Two thousand dollars may be a big bite for many parents, who already struggle with child-rearing costs. But, smaller amounts would grow at the same pace.

Whatever the amount, starting a retirement program early is a good way to teach your children the value of saving and the basics of long-term investing - which is the best kind.