The Gift that Keeps on Giving

As the holiday shopping season approaches, many of us struggle to make our gift lists.  This can be a frustrating exercise, particularly when it comes to you adult children and grandchildren.  What can we possibly give them that will be appreciated and not be sitting on the dresser in a week when the next new gadget comes along?  Why not consider a gift that will keep on giving long after your gone?

If your children or grandchild had earned income from employment during 2011, you can contribute up to $5,000 or 100% of their total earnings (whichever is less) in a ROTH IRA in the child’s name.  [Remember that what you put in to the ROTH IRA counts toward the $13,000 annual gift exclusion; $26k if your spouse contributes to the gift].

Why is the ROTH IRA such a great gift?

  • It grows tax-free over time.  A $5k contribution to a 16 year-old’s ROTH IRA earning 8% each year will grow to $217,000 by age 65*.  If the child works summers during high school and college and contributes each year, the future balance in the account will likely be significantly larger.
  • ROTH IRAs provide tax-free withdrawals after age 59 ½**.
  • In some specific situations, the child can pull out contributions (not earnings) free of tax (i.e. for the purchase of a first home).

A Roth IRA can be one of the best gifts you can give…one that will be giving for years to come.


*This is a hypothetical illustration and is not intended to reflect the actual performance of any particular security.  Future performance cannot be guaranteed and investment yields will fluctuate with market conditions.

**Unless certain criteria are met, ROTH IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted.