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Answer:
Dear
BuyandHolder,
What
a nice, timely question - as lots of kids are in the
midst of summer jobs.
Yes,
your son can contribute to a Roth IRA as long as he
has documented earned income. There is no minimum
age and the earned money can come from one job or
several jobs, from full-time or part-time employment.
(It cannot, however, be derived from unearned income,
such as stocks, bonds, bank CDs, savings bonds or
savings accounts.)
The
maximum anyone under the age of 50 can contribute
for 2007 is $4,000. So, even if your son has landed
a super job earning $5,250, he still can contribute
only $4,000.
On
the other hand, if he earns $850 in 2007, that's the
total he can contribute for the year.
Incidentally,
if he spends all $850 on pizzas, movies and gas for
his Harley, and if you're willing to give him $850,
he can contribute that $850 to his Roth.
Note:
The maximum contribution for 2008 will be $5,000.
Keep
in mind that although there is no tax deduction for
contributions to a Roth, the money inside the account
grows on a tax-free basis. That's a terrific deal
for a young person - it means even small amounts can
lead to an impressive figure by the time he is 59?.
I
mention age 59? because it's a key number. As long
as your son does not withdraw money until he reaches
that magical age, he will not owe taxes on it.
And,
here's another nice break -- those who have owned
their Roth for five years can take out up to $10,000
and use it for the purchase of a first home without
paying taxes or the 10% early withdrawal penalty.
Running
the numbers
If
you and your son go to: www.dinkytown.net
you'll find a number of fascinating financial calculators.
In the middle column, click on "Roth IRA" and run
the numbers.
If,
for example, your son starts with zero in the account
and contributes $1,000 annually from age 17 to age
59? -- assuming he's in the 10% tax bracket and the
account earns an average of 6%, he will have $271,958
when he turns 65.
If
he contributes $4,000 a year, the amount would be
an impressive $1,087,834.
I
selected the 10% tax bracket because that's the bracket
into which a single taxpayer with annual income between
$0 and $7,550 falls.
Note:
Actually, 6% is a low earnings estimate; the 10% tax
bracket is also on the low end. At various times during
his working years, your son will probably be catapulted
into a higher tax bracket and at the same time, some
years the account will undoubtedly earn more than
6%. Keep in mind however that, the securities markets
are subject to the risks of fluctuating prices and
the uncertainty of rates of return and yields inherent
in investing and past performance is no guarantee
of future results.
Just
so you'll know, the current tax brackets are: 10%,
15%, 25%, 28%, 33% and 35%. And, Congress could change
them at any time.
Although
financial calculators do not reflect real life situations
with 100% accuracy, they provide enough solid information
to be persuasive - more so, perhaps than you could
be. The calculators unflinchingly and unemotionally
document the fact that regular contributions to a
Roth pay off in an impressive way.
Opening
a Roth IRA
Click
here for BUYandHOLD's age requirements, to
see if your son can open an account in your state.
Click
here for more information about Roth IRA accounts
at BUYandHOLD, and click
here to open an account. Good luck!
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