So you're a high school or college student just starting a summer job. Congratulations.
Now, what are you going to do with all that money?
How about opening a Roth IRA?
If you're like I was at your age, saving for retirement is probably about the last thing on your mind. Most of my summer earnings went for gasoline and other necessities, such as motorcycles and 25-cent-a-glass refreshments at a wholesome gathering place called George's, which my parents didn't know about.
But the Roth IRA is not as out of line as you might think - because you might be able to get your parents to pay for it, leaving you with all that cash to spend on things of more immediate use.
Here's how it works: Individual Retirement Accounts are for saving for retirement. This year, you can put as much as $4,000 into an IRA. There are two types.
The older type - the traditional IRA - allows investments to grow tax-free until money is withdrawn in retirement, when it is taxed at ordinary income-tax rates. This tax deferral allows your money to grow faster than it would if some of your earnings had to be used to pay tax every year.
In addition, a person with a small income can generally get a federal income-tax deduction on all money put into a traditional IRA. Put in $1,000 and you might save $150 in tax.
As good as that sounds, it's not worth much to people whose income is limited to summer jobs because they're not likely to owe income tax anyway.
This is why the second type of IRA, the Roth, is so appealing. Roths are like traditional IRAs turned upside down. They don't offer a deduction on contributions. But there is no tax on investment profits - ever.
If you put $4,000 into a Roth this year and earned 7 percent a year, you'd have about $118,000 when you retire in 50 years. You could take that out and owe no tax on the $114,000 in profits. Take that much out of a traditional IRA and taxes would be tens of thousands of dollars.
Roths have a couple of other advantages over traditional IRAs. First, you won't have to start withdrawing money after you turn 70 1/2, as you do with an ordinary IRA. In fact, you could continue putting new money into a Roth after that age, which you can't do with the other type of IRA.
With a Roth, you can take out your contributions at any time without facing the tax and 10 percent penalty imposed on withdrawals from traditional IRAs by people not yet 59 1/2.
Investment gains also can be withdrawn free of tax and penalty, so long as the account was opened at least five years earlier and you have turned 59 1/2.
Also, you can withdraw up to $10,000 without penalty or tax to pay for a first home. Liberal withdrawal policies overcome one of the concerns young investors have about ordinary IRAs and 401(k)s - that money will tied up when nonretirement needs arise.
Now for the part on getting your parents, grandparents or other benefactors to fund your Roth.
The rules for both types of IRAs say that money put in during any given year cannot exceed the investor's earned income for that year. If you make only $2,000 this summer, that's all you could put in, even though the maximum contribution is $4,000.
The earned income requirement also means that if you have no income, other people cannot put money into your account for you.
But your parents (or other benevolent souls) are allowed to give you money. So they can replace any money you contribute to a Roth, leaving you free to use your summer earnings as you like. They could even help you fund a Roth before you've earned the money. If you earn it by the end of the calendar year, that's good enough.
You have until April 15, 2006, to make your 2005 contribution. IRAs are offered by most banks, brokerages and mutual fund companies.
Put as much as you can into a Roth. In 50 years, you will be thrilled with the result.