 IRA’s: It’s Never Too
Early to Start Thinking About Retirement
By Dan Stringer
Retirement? But I’m only 14. You
may be, but by investing now you take advantage of over 50 years of
compounding interest. Investments made by you from income earned from
either a part-time job or your self-owned business are an excellent way to
save for retirement. The money you save as a teen could grow to over one
million dollars by retirement age. So, how do you get started? An
excellent way to do this is through the use of an Individual Retirement
Account or IRA. This is an account set up by you and your parents, if you
are under the age of 18, which has excellent tax advantages for the long
term.
There are two primary types of
IRAs. The first is a traditional IRA, in this type of IRA the money you
invest is tax deferred until the money is withdrawn at retirement age. The
second is a Roth IRA, with a Roth IRA, the investment is made with money
that you have already paid taxes on, meaning that it allows the earnings
to grow tax-free. When the funds are withdrawn from a Roth IRA at
retirement age, there are no federal taxes owed on any dividends or
capital gains earned provided certain conditions are satisfied.
No taxes when I take it out? Get out!
Here is why a Roth IRA makes
sense for teens:
 Compounding Interest. You can
invest up to $2,000 dollars per year in either a traditional or Roth IRA.
That may not seem like much. But you most likely have between 45 and 50
years until retirement. During that time the money will multiply many
times over. Provided you leave it alone and continue to contribute
annually. There is a catch however; the money must be from earned
income. Earned income is basically money that you have earned by
yourself through a job or business. To qualify for an IRA, you must have
eligible earned income, not investment or interest income, to report for
the tax year and be able to prove it by providing a federal tax return,
w-2 form, or other tax document from your employer, or business. For
instance, a 16-year-old starts investing $2000 a year in an IRA and
continues to invest the same amount each year for 49 years until the age
of 65. At an assumed annual interest rate of 8% the IRA could grow to over
$1 MILLION by age 65.
There are other advantages to
start investing now. While IRA accounts are intended for retirement, there
are exceptions that permit early withdraws before age 59 ½. After five
years you can withdraw up to $10,000 from a Roth IRA for a down payment on
a first-time home purchase without paying taxes or early withdrawal
penalties. Another advantage to having an IRA is called net assets, with
this money in the bank you can borrow against it using it as collateral on
a home or car loan from a bank. Banks look at your overall financial
standing and base their decision to approve or decline your loan on these
criteria. For teens interested in making IRA contributions now, there’s
still time to take advantage of this investment opportunity for the 2000
tax year if you act before April 15th 2001.
Hey Ho! Let’s Go
 Here’s how to get started. Get
advice from one of your parents or a teacher on which investment firm or
bank you should call to open your account. Most banks today offer complete
brokerage services that generally have cheaper fees than traditional
brokerage firms do. Next,
with your parents, call the
bank or brokerage firm. Try to do most of the talking yourself but let the
person know that your parent is on the line. Let the person guide you
through the process; typically, it should not take more than 15 or 20
minutes. There will be many investment choices for you to choose from, so
some prior research will be helpful in making your selection or selections
of stocks, mutual funds, or other investment tools. Many mutual fund
companies will set up a Roth IRA on behalf of a minor for as little as
$250. Requirements may vary from firm to firm, but here’s what you
should expect.
If you are a minor, most financial
institutions will require your account to have an adult custodian. Your
parents will control the investment decisions on the account until you
reach the age of majority that varies from state to state. Generally, you
should have input into the choices being made for you though. Talk it over
with your parents, or custodians, and give input on what type of stocks or
funds to purchase. Try to start by choosing a stock that you have an
interest in such as a fast food chain, video game or computer company. By
doing so you know that the money you spend eating that cheeseburger or the
$50 you spend on a new video game is some how making you money because
every little bit helps.
After that, try to keep an eye on
your investment/s and take every opportunity to build upon the strength of
invested money by promoting the companies you have invested in. That way,
every time you see someone using a
product made by the company you’ll know that it’s making you money for
your future. Then, one day when you’re ready to retire, you’ll have
built your own road to riches and can look back on how much fun it was
enjoying the ride.
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