Our son is graduating from college, and we’d like to open a Roth IRA for him as a graduation gift. He’ll be starting a job in the fall but doesn’t work now. Can we contribute to an IRA for him even though he isn’t earning money yet?
What a great graduation present! Contributing to a Roth IRA now can give your son a huge head start on building a tax-free stash of money for retirement. If he’s no longer a minor (generally age 18 for IRAs; ask the IRA administrator about the rules in your state), he’ll need to open the Roth IRA himself. But you can give him the money to contribute to the account.
Your son must earn some income from a job during 2013 in order to qualify to make Roth contributions. But he can contribute the money now, even if he doesn’t start working until the fall; he just needs to earn at least as much as the contribution amount -- with a $5,500 maximum in 2013 -- by the end of the year (investment income and allowances don’t count). If he earns $3,000 for the year, for example, then he can contribute up to $3,000 to the account. If he doesn’t end up getting a job by the end of the year -- or if he earns less than the contribution -- he has until October 15, 2014, to withdraw the contribution and earnings on it from the account without having to pay the 6% penalty for excess contributions (but he will have to pay taxes on the earnings he withdraws). For more information, see the “excess contributions” section in IRS Publication 590, Individual Retirement Arrangements.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Contributing to a Roth IRA can also be a great gift for high school graduation. Kids of any age can contribute to a Roth IRA, as long as they’ve earned some income from a job during the year. A few brokerage firms and mutual fund companies don’t let minors open IRAs, but several firms make it easy to open an account and have low fees and investment minimums. TD Ameritrade, for example, has no minimums or annual fees for its IRAs, and you can invest in anything that is available to its brokerage customers. The IRA must be in the minor’s name as well as the custodian’s name, and it must use the minor’s tax ID number. Charles Schwab allows minors to open a custodial Roth IRA with $100; it charges no annual or maintenance fees.
-
Stock Market Today: Dow Climbs 288 Points After Amazon, Intel EarningsPost-earnings strength from Amazon and Intel helped cushion the blow of a disappointing October jobs report.
-
Nvidia Stock Is Joining the Dow. Is It Time to Buy?Nvidia will replace Intel in the Dow Jones Industrial Average this Friday. What does it mean for the stock?
-
The Advantages of Brokered CDsBrokered CDs are certificates of deposit sold by brokerage firms that typically offer higher yields. But they don't come without some risk.
-
Schwab, TD Ameritrade, E*Trade, Fidelity Go Commission-Freeinvesting TD Ameritrade commissions vanish Oct. 3, Schwab and E*Trade start Oct. 7, Fidelity finally joins in effective Oct. 10
-
Credit Report Error? They All Mattercredit & debt Don't dismiss a minor error. It could be the sign of something more serious.
-
Insurance for a Learning Driverinsurance Adding a teen driver to your plan will raise premiums, but there are things you can do to help reduce them.
-
Getting Out of an RMD Penalty
retirement When your brokerage firm miscalculates your required minimum distributions, you have recourse.
-
529 Plans Aren’t Just for Kids529 Plans You don’t have to be college-age to use the money tax-free, but there are stipulations.
-
When to Transfer Ownership of a Custodial Accountsavings Before your child turns 18, you should check with your broker about the account's age of majority and termination.
-
Borrowers Get More Time to Repay 401(k) Loans
retirement If you leave your job while you have an outstanding 401(k) loan, Uncle Sam now gives you extra time to repay it -- thanks to the new tax law.
