If your children or grandchildren are still in school, with a part-time or seasonal job, they should put their earnings into a Roth IRA. Over time, those accounts can grow surprisingly large.
Currently, up to $3,000 worth of earnings a year can be put into a Roth IRA. Even though this money is invested with after-tax dollars, it may be a good choice because the youngster’s tax bracket is likely much lower now than it will be when he or she retires. A recent tax cut makes the tax bite fairly painless: the IRS probably will take only 10 percent of that money before it goes into a Roth IRA.
On the other hand, compare what your student would lose to taxes with a traditional IRA, where investors avoid taxes now but pay later. For a youngster, the more a traditional IRA grows, the greater the tax on the back end. Ultimately, taxes probably will be paid at rates higher than 10 percent.
Withdrawals from a Roth IRA are not taxable after you’ve had the account for five years and are at least 59 1/2 years old. If investments perform as they have in the past, a few thousand dollars invested in a Roth IRA now, for someone under 20, could become a six-figure account, after age 60.
