Helping Your Children Plan for a Distant Future

Last month we discussed the tax strategy of employing your children in the family business and possibly contributing all or part of their salaries to an Individual Retirement Account (IRA) that you set up for them. In fact, however, an IRA may be a good idea even if your children work for someone else.

As a practical matter, since children usually don't earn much from a summer job or a paper route, you may wonder why they would want to save their earnings when retirement is the farthest thing from their minds. However, there is a way to let them work and have some spending money while you build a substantial retirement fund for them.

Perhaps your daughter, for example, starts earning money at age 13 by babysitting and also works as a counselor at summer camp from age 16 until she graduates from college. During each of those years she puts $2,000 into an IRA, and you give her $2,000 each year, in addition to your other financial support, to compensate for her IRA contribution.

When she reaches 22, she lands a permanent job and continues to contribute $2,000 a year of her own money to her IRA. Her contribution will be deductible. (In the previous years, she may have had insufficient income to owe federal taxes and thus claim deductions.) By beginning contributions so early, and through the effect of compounding, she can build up a very substantial retirement fund. Lewis Siegel of Siegel Benefit Consultants, actuaries in Rutherford, N.J., says that even if your daughter stops contributing at age 25, if the IRA averages a 7 percent annual return for the next 52 years, the account would grow to more than $603,000 to provide for her retirement at age 65.

Many parents say children should be allowed to spend only what they earn. But if you view this as $2,000 that the child would not receive if he or she had not earned that amount, you maintain the motivation for the child to work. You also have begun a modest "gifting" program to your child that could result in a dramatic retirement program.

You can make deductible contributions to an IRA of up $2,000 a year. But if either you or your spouse is covered by a qualified retirement plan, your contribution is fully deductible only if your adjusted gross income is under $25,000 if single or under $40,000 if married filing jointly.

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