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Roth IRAs

Last-Minute IRA Contribuitons

There's still time to open an account for your child if he or she has earned income.

Editor's note: This is the transcript of Kiplinger Editorial Director Kevin McCormally's commentary on the April 16 broadcast of Nightly Business Report.

Tonight I want to talk about a way to jump start the younger generation on the way to becoming both savvy taxpayers and financially secure in their retirement. I'm talking about helping children or grandchildren fund a Roth IRA.

As soon as someone has income from a job -- whether it's a teen working retail or a college grad's first real-world job -- he or she can have an IRA. Of course, if you're trying to get by on $25,000 or $35,000 a year, saving for retirement too often seems an unaffordable extravagance.

That's where parents come in. You can give the youngster the money for a Roth -- up to $4,000 as long as he or she made at least that much from working in 2006. And, let me remind you about the magic of compounding. A single $4,000 deposit in a 22-year-old's Roth IRA today will grow to nearly $300,000 when he or she applies for Social Security ... assuming the account earns an average of 10% a year. In the Roth, it will all be tax-free.

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There's still time to make a 2006 Roth deposit, too ... and you can do it even if the youngster you want to help out has already filed a tax return for the year. Roth contributions aren't reported on the forms. Just make sure the beneficiary of your generosity gets the money in the IRA by close of business tomorrow.

A last-minute Roth contribution might even earn a valuable tax credit. As long as the newly minted Roth owner is not a dependent -- and was not a student during 2006 -- the "retirement saver's" credit can refund between 10% to 50% of the amount stashed in the Roth. The credit is available to those whose income is less than $25,000 on a single return or under $50,000 on a joint return.

See Kevin's previous tip.