Roth IRAs for Kids

Children who earned any income from a job in 2009 can contribute to a Roth IRA, which can give them a huge head start on their future. They can contribute no more than the amount they earned for the year—with a $5,000 maximum in 2009—but even a small investment can make a big difference over the long run.

If your 17-year-old son earned $4,000 as a lifeguard, for example, investing that $4,000 in a Roth IRA could grow to $117,000 by the time he reaches age 67, if his investments earn 7 percent per year. He can withdraw the contributions tax- and penalty-free at any time, and can take the earnings tax-free after age 59½. If he gets in the habit of saving and invests $4,000 every year until retirement, then he could amass an account worth more than $1.7 million by the time he’s 67, assuming 7 percent annual returns. And the money will all be tax-free—all from that $200,000 invested over his working lifetime.

Few youngsters will want to invest all of their summer earnings into an account they won’t withdraw for years, but you can give your child the money to make the contribution, or perhaps offer to match contributions dollar for dollar. They have until April 15, 2010, to make 2009 contributions.