Your Baby Needs a Retirement Account

Oh, the joys of parenthood. Every day brings a new miracle, a new milestone, a new photo opportunity, and an opportunity to plan for retirement. Retirement? If you think it's too soon to plan for your child's golden years, think again. With several types of IRAs at your disposal, you can give your little one something that they will absolutely grow to appreciate. And, so will you.

Do you really need to take on your kids' retirement planning so early on? Technically, no. But don't you wish that your parents had started you on the road to long term planning? Wouldn't it be nice if, in addition to your already brimming retirement account, you had an extra $100,000 growing tax-free with your name on it?

It's the same principle, really. Of course you're managing heady, financial issues every day. But setting up a retirement account for your kids is a great way to get them thinking about their own financial futures. It can be a catalyst for deeper discussions with your kids, as they get older, as they begin working, spending, and you encourage to fund their own accounts. In terms of making basic investment decisions, the long-term environment of a retirement account offers a great opportunity to explore ideas and correct mistakes in strategy.

Consider Your Own Future, Too

Even more essential, however, is your own financial picture. If you're worried about being able to leave money for your kids when you're gone, then investing for them today can be the best way around for you to leverage a little cash into a big pay-off tomorrow. Parents today, unduly burdened by high costs, the care of elderly relatives, and the complicated needs of their families, are often worried about being able to accumulate significant wealth that can both fund their retirements and be shared with their families. Since so many folks will depend upon the sale of their home to provide the basis of their post-retirement wealth, leaving a significant legacy to their kids seems impossible. In this light, a retirement account suddenly makes sense.

Although it may seem counter-intuitive, establishing a Roth IRA can be a terrific idea for young kids, since they don't need the tax deduction. (A Roth IRA foregoes the usual tax deduction by letting your money accumulate tax-free. Remember, recent tax law changes going into effect next year include new, phased-in contribution limits for IRAs and Roth IRAs: $3,000 in 2002, $4,000 in 2005, $5,000 in 2008 with limits indexed in future years. This is great news.)

But back to your little ones... $2000 invested today and left to compound for say 65 years at a 10 percent return, will grow to $143,000 tax-free. If $2000 was invested every year for three years and left untouched for 62 years, a baby-turned-retiree could draw on $521,830, absolutely tax-free. Now isn't that a nice way to offer your kids an inheritance without actually giving them your hard-earned cash or the proceeds from the sale of your family home?