How cool? Here’s what SmartMoney writer Bill Bischoff says:
“Say your 15-year-old pays $1,000 into a Roth IRA each year for three years, starting this year. After 45 years (when your gray-haired ‘kid’ is 60), the account would be worth over $25,000 — assuming a 5% annual rate of return. If you assume a more-optimistic 8% return, the account would be worth just under $89,000.
“Say your child contributes $1,500 for each of the three years. With a 5% annual rate of return, the Roth account would be worth about $38,000 in 45 years. At 8%, it would be worth about $132,000.”
For the 2012 tax year, your child can contribute the lesser of: (1) earned income or (2) $5,000, Bischoff explains.
Say your child wants to use the money to buy an iPad and other toys instead …
Bischoff points out that your kid can withdraw all or part of the Roth contributions — without any federal income tax or penalty — to pay for college or for any other reason. Contributing to a Roth is preferable for children because their earnings will likely be too low to realize any tax advantage from a traditional Individual Retirement Account.
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