Wednesday, June 2, 2010

Q&A: Youth and IRA Contributions

Question: My 16 year old son is working this summer and I wondered if he can contribute to an IRA?

Steve H., Denver, CO.

Answer: Steve, your son is in luck, as he can contribute up to $5,000, or the amount of his earnings, whichever is less. You can even gift this amount to him, although this will count against the $13,000 annual gift amounts.

If a 16 year old contributes $5,000 to his Roth IRA (the most attractive IRA for younger workers) this year, it would be worth $137,650 when he turns 65 and $193,061 at age 70, assuming an annual rate of return of 7% per year and no future contributions (i.e. only the initial $5,000 contribution). A Roth IRA is tax free when withdrawn and the funds can also be used for other purchases, such as a first home.

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