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Introduce Roths to the younger generation

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in Small Business Tax,Small Business Tax Deduction Strategies

Believe it or not, even teenagers can take advantage of tax-saving retirement plans.

Strategy: Have your child contribute part of his or her summer wages to an IRA. The savings can build up tax-free over time into a sizable nest egg.

Even better: Opt for a Roth IRA for greater after-tax savings.

You can’t deduct Roth IRA contributions as you can with a traditional IRA contribution. But the tax deduction won’t do your child much good this year, anyway, in his or her low tax bracket. On the other hand, future distributions from a Roth IRA may be tax-free.

Example: Your 15-year-old daughter earns $3,000 from babysitting and odd jobs this summer. She contributes the $3,000 to an IRA. To keep it simple, let’s say she continues to make annual $3,000 contributions, and the funds earn 8 percent a year.

Assuming that your daughter will be in the 28 percent federal income tax bracket when she reaches age 60, she’ll receive an after-tax distribution of $999,209.

But she could pull $1,252,278 tax-free— $253,069 more—from a Roth IRA. (Use an online calculator, such as the one at, for your own situation.)

If your daughter isn’t inclined to contribute her babysitting money to any IRA, you can help her out. Give her the $3,000 this year, and let her handle the money. It doesn’t matter if you’re the one actually supplying the cash for the contribution.

You can even fund a Roth IRA for a child who isn’t working yet. Suppose your mother watches your infant child for you and your spouse. You pay Mom for her babysitting services, so she can set up a Roth IRA—naming your child as the beneficiary—and contribute to it within the annual limits.

Distributions can ultimately be stretched out over the child’s life expectancy

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