IRAs for Kids: It's Never Too Soon

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For example, Fidelity won't allow anyone under 18 to have an account in his or her own name, but Vanguard will. Until your child turns 18, you're the custodian of the account and children can't take the money out independently.

Investment options are the same as with any other IRA. Costa decided to "invest aggressively for my boys, because it's such a small amount of money and the child's account literally has 50 years" in which to grow. Discussing how to invest the money could be educational and also a way to get your children more involved in and committed to the account.

Don't Forget Charity Lessons

The usual rules on IRA withdrawals also apply. With some exceptions, taking money out before age 59 1/2 results in a 10% penalty and a bill for income tax. With the Roth IRA, the account must also have been open at least five years in order to avoid an early withdrawal penalty. See IRS Publication 590, Individual Retirement Arrangements,, for details.

Despite what many see as the plusses of starting children on retirement savings early, there are naysayers who warn parents against reimbursing kids for the money they've earned in order to sock it away in their IRA. One is Bob Nusbaum, a financial planner in Pittsburgh.

In an e-mail to me, Nusbaum wrote: "It's hard to imagine a better way to provide a child with a lifelong sense of entitlement and lack of incentive than to take care of their retirement before they ever even leave your house. If parents are in a position that they have such a surplus of money that funding their kid's retirement is an option, maybe they should consider some other alternatives. For example, show them ways that money can be used to help others in need—disadvantaged and/or sick children would be a great choice."

Nusbaum's was the minority opinion among people I spoke to about helping children save for retirement. But even if you agree with him, you could still encourage the working and saving habit in your family by not giving the gift to match the earnings kids contribute to their IRA.

In addition to writing Your Retirement for BusinessWeek.com, Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. You can contact her through her Web site, www.retirementcatchup.com.

Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. Her Your Retirement column may be found at businessweek.com/investing/. You can contact her through her Web site, retirementcatchup.com.