Ask Terry Questions IRA For New Graduate

IRA For New Graduate

By Terry Savage on January 02, 2015 | Financial Planning / Retirement

As part of a high school graduation present I wanted to start either an IRA or a ROTH IRA for my son. Which IRA would best? Also what type of investment should we pick?
Thanks

Terry Says:  Well, you can’t start an IRA for him unless he had EARNED INCOME — that is, income from work (not dividends, interest, or gifts).  If he meets that threshold, be sure to ask him if he is covered by a plan at work.  That would dictate the kind of IRA you could open for him.  And assuming that he is not covered, and has income of under about $112,000 last year, then I suggest opening a Roth IRA.  He won’t get a deduction, probably doesn’t need it, if it’s a ROTH, but the money will grow tax-free.  And if  you want my suggestion for an appropriate fund, I’d go to www.TRowePrice.com, and open the Roth in their Equity-Income Fund (full disclosure, I’ve owned it “forever”).

You can contribute up to $4,000 — IF he had that much earned income (even if he spent all his money!)  But if he earned less, then that’s the limit he can contribute.  And if he didn’t work at all last year, make it a challenge grant for 2015:  Tell him that you will “match” up to $2500 of his own retirement contributions this year, assuming he’s now starting work.

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