ASK KIM


Help Your Kids Save for Retirement

Kimberly Lankford

You can contribute to an IRA for your child as long as he or she has earned income.



My daughter works, but her job has no retirement plan. I would like to start an IRA for her. Can I?

You sure can. If your daughter has earned income from a job, she can contribute to an IRA. And you can give her the money to invest. It's a great way to help her start building a valuable nest egg, even if she doesn't have much money to save now.

If your daughter had earned income last year, she still has until April 15, 2008, to contribute up to $4,000 (or the amount she earned, whichever is less) to an IRA for 2007. And she can contribute up to $5,000 to her IRA for 2008, too.

Because she doesn't have a retirement plan at work, she can make tax-deductible contributions to an IRA. However, her tax bracket is probably low now, so she wouldn't benefit much from a deduction.

Instead, she should open a Roth IRA, which does not give her a tax deduction now but provides tax-free money in retirement. She'll be able to withdraw the contributions without taxes or penalties at any time and can take out the earnings tax-free after age 59½, if she's had a Roth for at least five years.

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To qualify for a Roth, her adjusted gross income in 2007 must have been less than $114,000 if single ($166,000 for married couples). The income limits increase slightly for 2008 contributions, to $116,000 for singles and $169,000 for married couples.

The account can grow significantly over time. If she's 25 years old now and contributes $4,000 every year for the next 40 years, then she can accumulate more than $1.1 million by the time she's age 65, if her investments return 8% per year. And she can withdraw it all tax-free because she'll be over age 59½. See Why You Need a Roth IRA for more information about the benefits of a Roth IRA and advice for getting started.

By making an IRA contribution, your daughter may also qualify for the Retirement Savers' Tax Credit, which can lower her tax bill by up to $1,000 (as long as she is not a full-time student or dependent). For more information on this frequently overlooked tax credit, see Qualifying for the Retirement Saver's Tax Credit (children under age 18 and full-time students, however, do not qualify).

You can even open a Roth IRA for a teenager who just earns income from a summer or weekend job. The contribution amount is limited to the amount of money the child earned from a job for the year. So if your child earned $2,000 working as a lifeguard during the summer, she can contribute up to $2,000 to a Roth IRA for that year.

Again, you can give your child the money to make the contribution. For more information, see Can Your Child Open a Roth IRA?.

If you're giving your child money to invest, just remember that you can give only up to $12,000 per person in 2008 without being subject to gift taxes (or $24,000 from you and your spouse).

Got a question? Ask Kim at askkim@kiplinger.com.




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