IRA contributions by high school and college-age children.

• Author: Edmunds, Mark
• Position: Brief Article

High net worth individuals should encourage individual retirement account (IRA) contributions by their employed high school and college-age children.

Eligible individuals can make a deductible IRA contribution equal to the lesser of $2,000 or earned income for the tax year. In addition to the deduction, the tax deferred growth is very beneficial in starting a retirement fund at an early age. Since most working children use funds for living or education expenses, parents can use part of their annual $10,000 gift exclusion to fund the $2,000 contribution for the child. This is attractive because it enables the high net worth individual to remove assets from his taxable estate and ensures that the child will not be able to access the funds (without penalty) until age 59 1/2. In addition, the appreciation on the transferred funds over the parent's lifetime will not be included in his taxable estate.

Funding an IRA account at age 18 as opposed to age 25 will result in significantly greater...