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IRAs for Your Children

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So Junior has a paper route, you say? Sweet Pea is bagging groceries at the local supermarket? Well, then, I've got to ask you ... they've begun investing in a Roth IRA, right?

In case you weren't aware, minors can contribute to IRA accounts -- as long as they do so with earned income. A $500 birthday check from Uncle Lenny won't cut it.

This might seem a little ridiculous, to think of youngsters who make very little each year sacrificing a chunk of that pittance to retirement savings. But think again. If you're 45 now, you have about 20 or so years until you hit a typical retirement age. Money you invest now for that day will have 20 years to grow. If it does so at an annual average rate of 10% (the stock market's historic average), each dollar will become $6.73.

Meanwhile, if Junior socks away $1 at age 15 and it has 50 years to grow until he hits 65, that dollar will become $117! So a mere $500 invested in an IRA can turn into more than $58,000. If by age 20 Junior has managed to save $2,500, and it has 45 years to grow, it would become $182,000, growing at 10%. (If he manages to average 12% growth, it would become a whopping $410,000!)

I hope you're beginning to appreciate the power of time -- young people have much, much more of it than adults do, and it's a powerful tool to make money grow.

It gets better
But wait -- there's more! If your kids invest in Roth IRAs, odds are they'll be able to withdraw their entire nest egg tax-free! (Unless the current rules change, which could happen by the time they retire. Fair warning.)

Finally, note that your children don't even need to be working for someone else. You can employ them yourself, and have them fund their IRAs from earnings they receive from you. This is a little trickier, though, and might raise eyebrows at the IRS. So if you're going to do it, do it right. It needs to be real income for real work. File a Schedule H with your tax return and issue your kids W-2 forms. You might even need to apply for an employer tax ID number. If this sounds too complicated, just tell them to look into getting that paper route.

But don't shortchange the power of an IRA. Effective investments there can yield powerful growth. Even after a horrible 2008 for the stock market, stocks such as Dell (Nasdaq: DELL  ) , General Dynamics (NYSE: GD  ) , and Amgen (Nasdaq: AMGN  ) -- all of which have average annual returns greater than 20% over the past 20 years -- could help your kids' retirement money grow quickly.

Some successful long-term performers are already household names to your kids, providing a great and easy way to help them learn about investing. Take a look at how these kid-popular companies have done over time:

Stock

10-Year Average Return

5-Year Projected Earnings Growth

Marvel Entertainment (NYSE: MVL  )

19.2%

15.9%

Apple (Nasdaq: AAPL  )

28.8%

17.2%

Urban Outfitters (Nasdaq: URBN  )

25.5%

19.0%

Activision Blizzard (Nasdaq: ATVI  )

26.4%

17.4%

Source: Yahoo! Finance.

Learn much more about IRAs right here.

I also encourage you to take advantage of a free 30-day trial of our Rule Your Retirement newsletter service. It's prepared by Robert Brokamp, a smart and witty guy who distills what you need to know into something both you and your kids can learn from. A free trial will give you full access to all past issues, allowing you to gather valuable tips and find out how some folks have retired early and well. Robert regularly offers recommendations of promising stocks and mutual funds.

For more on how IRAs can help you:

Frustrated with your 401(k)? Even if your employer's plan isn't the greatest, you don't have to give up your dreams of a happy retirement. Get the tips you need to turn your retirement savings around in our special report, "How to Make The Most of Your 401(k)" -- just click here for instant free access.

This article was originally published Sept. 5, 2007. It has been updated by Dan Caplinger, who doesn't own shares of the companies mentioned. Dell is a Motley Fool Inside Value recommendation. Apple, Activision Blizzard, and Marvel Entertainment are  Motley Fool Stock Advisor selections. Try any of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.


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Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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