One of the greatest benefits of an IRA is the tax-free accumulation of the invested funds. The more years the funds are earning for the owner, the greater the accumulation.
A 15-year-old with a retirement plan will have about 50 years worth of growth in his or her fund. The current annual contribution limit to an IRA is $2,000. Your child can contribute all of his or her earnings up to that amount.
What if the child has already spent all he earned? No problem! Mom and Dad or Grandma and Grandpa (or any other friendly soul) can make a gift to the child of the amount to be invested in the IRA>
Here is what the numbers will look like. If a single-year contribution of $2,000 is made by a 15-year-old, he or she will have over $90,000 at age 65 if the fund earns 8% per year.
And what if there are contributions of $2,000 per year from age 15 through age 18 (four years) and no other contributions through to age 65? The total accumulated funds would exceed $300,000 at annual earnings of 8%.
If the child can manage through college, marriage, or whatever to continue the full allowable annual contribution of $2,000 to age 65, what will he or she have? At an 8% return, the age 65 value will be over a million dollars. Note that the lion's share of the growth came from the earliest contributions. At a 10% return rate the fund would be in excess of two and one-half million dollars. It is essential to maximize the rate of return on the IRA funds.
The important thing here is that the child has earnings that established the "right" to make an IRA contribution. It is not necessary that the child be investing the actual money earned.
If you would like assistance with your family money matters, please contact Kenneth D. Eichner, P.C. We are here to help you. You don't need to be a prior or current client of this firm to contact us.