Give Your Graduate a Head Start on Retirement

Are you trying to choose the perfect gift for a June graduate? Maybe you’re thinking about a car or a trip. Well, here’s a gift you may not have thought of: a Roth individual retirement account (IRA).

Why would you give a retirement account to an 18 year old? Long after “Pomp and Circumstance” is but a distant memory, your gift will still be giving. If you put $3,000 into a Roth IRA when a child is 18 — assuming an 8% annual return* and no withdrawals —the account might possibly be worth $111,696 at age 65 even if no additional contributions are made. And here’s the best part: All the money can be withdrawn tax free.

More Than Just Retirement
Roth IRA offers other advantages as well. Since they’re made after taxes have been taken out, contributions to a Roth IRA can always be withdrawn tax free, although earnings generally can’t be withdrawn prior to age 59½ without paying tax and a 10% penalty. However, earnings may be withdrawn without penalty — although taxes will still be due — if money is used for college expenses. And, up to $10,000 of earnings may be withdrawn tax and penalty free to pay first-time homebuying expenses.

Who’s Eligible?
To open a Roth IRA, the child must have earned income equal to the amount contributed to the Roth, up to a maximum contribution of $3,000. Income from a salaried job qualifies. So, if your graduate will earn at least $3,000 in 2003, you could contribute as much as $3,000 to a Roth IRA on his or her behalf. Make sure the child keeps good records and declares at tax time any income that doesn’t come from a salaried job. Keep in mind that non-wage income exceeding $400 triggers self-employment taxes.

A Roth IRA may be the perfect graduation gift. Talk to us if you’d like to open one for your graduate.

*This is a hypothetical return. Your returns will be different.