Retirement - Question 65

Can I open an IRA (Individual Retirement Account) for my infant daughter?

Yes, you can open an IRA for your daughter- if she earns income. For instance, if she earns income as a child model or actress that would be considered earned income. The amount of her earned income (up to $2,000) could be used to open an IRA, and the portion up to $2,000 would be deducted from her taxable income taxes.

Because of the benefits of compounding, opening an IRA account for children who have earned income is an excellent idea. For example, let's look at a grandparent with a grandchild who earned $2,000. If this IRA was opened when the child was 14, and every year $2,000 was contributed to this IRA for the next six years, the total contributions would be $12,000. Through compounding, and earning a 10% return annually, the earnings would grow tax-deferred. When that grandchild becomes 65 years old, he or she will have earned more than $1 million.