Kid IRA Q&A

My 15-year-old son earned about $2,000 last year working at a supermarket, and that was his only income. Does he have to file any kind of tax form to open a Roth IRA? What is the maximum he can earn before he has to file a tax return?

No, your son doesn’t have to file a specific form to contribute to a Roth IRA -- nor do you, for that matter. (For more on kids, work and taxes, see Babysitting and Taxes.)

As for filing an income-tax return, the rule is that if their only income is from a job, dependent children do not need to file a return as long as their earnings are less than the standard deduction, which is $5,350 for 2007 and $5,450 for 2008.

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Best investment for a teen

What is the best way for my 17-year-old daughter to invest $10,000 if college is already taken care of: a mutual fund or an IRA?

Your question includes a couple of common misconceptions that are worth straightening out.

First, a Roth IRA would be a good place for your daughter to invest, but she can’t just plunk down $10,000. In order to contribute to a Roth IRA (or a traditional IRA), she must have earned income from a job. And contributions for 2008 are limited to $5,000 or her total earned income, whichever is less. (See Can Your Child Open A Roth IRA? for more info.)

Second, you seem to be confusing a mutual fund with an IRA. As its name states, an IRA is an "individual retirement account," not an investment in itself. Once you open an IRA -- generally with a mutual fund company, a brokerage firm or a bank -- you can put your money into many different investments, among them mutual funds.

Assuming that your daughter doesn't need her money for at least five years, a mutual fund that invests in stocks would be very appropriate for her. Most funds require a relatively small minimum investment (generally $3,000 or less) and she would be spreading her money among a wide variety of companies.

If she isn't eligible for a Roth IRA because she has no earned income, or if she would like to invest the entire $10,000, she could buy a mutual fund in a regular investment account outside an IRA.

IRAs and college aid

If my child has a Roth IRA, will it count against her when she files for financial aid for college?

Probably not. The federal formula for calculating how much a family can pay toward college expenses doesn't assess retirement accounts -- and that goes for your child’s account as well as your own.

Some colleges do include retirement assets in their financial-aid calculations. But the impact of a child's IRA is likely to be minimal (see Roth IRAs and College Aid).