From August 6, 2009

Once your children start working, encourage them to fund an individual retirement account (IRA). This will help develop good savings habits while helping to fund their retirement.

Since most children will be eligible to contribute to either a traditional or Roth IRA, which is the best alternative for your children? In most cases, you'll want to encourage them to fund a Roth IRA. There are several advantages over a traditional IRA:

• Roth IRAs are more flexible than traditional IRAs. At any time, your child can withdraw all or part of his/her contributions, without paying any federal income taxes or penalties. Thus, if your children later decide they need the money for college, a car, a down payment on a house, or some other purpose, contributions can be withdrawn with no tax consequences.
  
   
• Earnings on the contributions will accumulate tax free, plus qualified distributions can be withdrawn tax free. A qualified distribution is one made at least five years after the first contribution and after age 59 1/2. Funds can also be withdrawn under certain conditions without paying federal income taxes or the 10 percent federal penalty. Thus, if your child allows the funds to grow until retirement age, he/she could withdraw all contributions and earnings without owing any federal income taxes. That could potentially be a significant sum.
  
   
• When your children first start working, they typically pay little or no taxes on their low income. So even though the Roth IRA is not tax deductible, your children typically receive little or no tax benefit from deducting the traditional IRA contribution anyway.