IRA's Make Great Gifts
By Paul M. Huber (firstname.lastname@example.org)
December 8, 2000
Foolish (grand)parents, are you having a hard time trying to decide what gifts to give your adult (grand)children for the holidays? Afraid to buy him an article of clothing that may not fit? Hate to buy her expensive jewelry she doesn't like and may never wear? Oh, the frustration of gift giving.
Instead of giving gifts that are here today and gone tomorrow, why not give a Foolish gift that will last a lifetime: an Individual Retirement Account (IRA).
Most young adults have income and could contribute to an IRA. However, at this stage of their lives they are busy purchasing cars and items for their households. Or they simply don't have the vision to see themselves reaching retirement age and will not invest for their long-term financial security. (Did we parents understand the importance of investing when we were young adults?) That is unfortunate, for the earlier they start investing the more wealth they may achieve over a lifetime.
For Foolish (grand)parents who are able and want to help a responsible adult (grand)child get a head-start on a secure financial future, the early IRA is an excellent gift. This is a true win-win situation. The gift-giving (grand)parent receives the benefit of having made all future gift decisions. This is similar to buying a gold necklace with a starter gold bead and then adding more gold beads at each successive gift-giving event. The necklace is an inexpensive start. And successive gifts of gold beads are inexpensive, too. But with the addition of more and more gold beads over the years it builds to a truly valuable gift.
The (grand)child will get started on a wealth-building program and learn the importance of systematic investments. He or she may achieve financial independence within their lifetime. In addition, the (grand)child may qualify for an income tax deduction with a regular IRA that will lower their income tax bill.
The requirements for an IRA gift are simple. The maximum allowable IRA contribution is presently $2,000 per year, provided the (grand)child earned that amount. An IRA may be opened at a mutual fund company, bank, or credit union. The (grand)child should be advised that an IRA is a long-term commitment; any withdrawals from a regular IRA prior to age 59 1/2 are subject to a 10% penalty, in addition to income tax. However, if you opened a Roth IRA, only the 10% penalty may possibly apply.
So what is possible? Invest $2,000 per year starting at age 24, receive the 10% historical long-term return of the stock market, and at age 65 the account will be worth approximately $1,000,000. Now that is truly a Foolish gift that will be long remembered.