Part 1 of Jim Sacher’s 12 Great Ideas for Tax Savings series
The New Year is often the time of year for taking another look at the financial opportunities that will improve your long-term savings while minimizing your 2015 tax exposure. You may be reviewing your IRAs and 401(k) plans, but have you ever considered opening an IRA for your child?
While IRAs are well-known among adult investors, they also make excellent savings vehicles for children. Your child – regardless of age – can contribute to an IRA provided he or she has earned income from a job. The deadline for contributions for the 2014 tax year is Wednesday, April 15, 2015.
Using an IRA can result in low or tax-free income to your children because of the IRA contribution tax deduction or a lower tax rate. And then there’s the miracle of compounding. Let’s say you open an IRA for your 14-year-old son and make $2,000 contributions for eight years until he is 21 years old. Using a modest growth rate of 3% means he will have acquired about $67,000 by the time he is 65. That may not sound like much, but if you think long term, and consider that the equity markets have returned upward of 10% over the last 50 years, the nest egg at age 65 at 10% would be about $1.6 million. That’s significant to anyone’s retirement.
Because many kids don’t earn enough money to benefit from the up-front tax deduction associated with traditional IRAs, it makes sense in most cases to focus on Roth IRAs. While you might miss the benefit of a tax deduction now, your child will be able to access the fund completely tax-free at age 65. By starting Roth IRAs early, they will acquire substantial tax-free assets by the time they retire.
Involve Your Kids
Kids can get involved by contributing as soon as they have a job. Even a small IRA can provide a platform to teach your child about saving, taxes, compounding and even the importance of retirement income. It’s a great way to kick-start their road to future financial success and well-being.
Stay tuned for the next article in our series on Prepaid Expensing. For questions on how you can take advantage of any of these tax savings ideas, please contact Jim Sacher at 440-605-7145 or firstname.lastname@example.org.