Roth IRAs for College Savings?
Yes, you can use these accounts to pay for college. Learn the rules and find out if this savings strategy makes sense for you.
I have two sons, ages 4 and 6. If I were to open Roth IRAs for them, could the money be used for college? From what I've read, the 10% early-withdrawal penalty would be waived, but the money would be considered taxable income for them. Is that correct?
You're partially correct. One of the nice things about the Roth IRA is that it's so versatile. You can withdraw contributions to a Roth IRA at any time without paying taxes or a penalty. If you dip into earnings, you'll owe taxes, but you won't be hit with the 10% early-withdrawal penalty if the money is used to pay for college. See Why You Need a Roth IRA for more about the account's flexibility.
But I'm afraid I have to toss a monkey wrench into your plan: You can't open Roth IRAs for your sons unless they have earned income from a job. And because they are only 4 and 6, I'm guessing that this is not the case.
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.
If saving for college is your primary goal, you'd probably be better off opening state-sponsored 529 accounts for your sons. To learn more, read The Ins and Outs of 529 Plans.
What about traditional IRAs?
Can I open a traditional IRA if I'm under 18 and get a tax deduction off my earned income for 2007?
Yes, you can. But Kiplinger's generally recommends that young people open a Roth IRA, which has no upfront tax deduction, because their income tends to be low and they won't miss the tax break. And unlike a traditional IRA, the Roth offers tax-free income in retirement.
But if you feel you need the tax break now, go ahead and open a traditional IRA.
Investment interest as income?
My daughter has a custodial account that earned about $1,000 in interest in 2007. She also worked for the first time last summer and earned about $1,050 at an ice cream store. Can I open a Roth IRA in her name for $2,050 for 2007?
Sorry, no. You can open a Roth IRA -- and by all means do it -- but only for the amount of your daughter's actual earned income, which was $1,050.
Independence not required
I am 20 years old, and during 2007 and 2008 I will earn $13,000 from an internship at a company. I would like to open a Roth IRA and make a contribution for each year. But my parents claim me as a dependent on their tax return. If I open a Roth IRA, will I have to be independent?
No, you won't. You can open your own Roth IRA even if your parents claim you as a dependent. When it comes to opening a Roth, the critical factor is whether you have earned income from a job, which you do.
For more on Roth IRAs for kids, see Can Your Child Open a Roth IRA? and Kid IRA QA.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.
-
What the Comcast Cable Spinoff Means for Investors
Comcast has announced plans to spin off select cable networks and digital assets into a separate publicly traded company. Here's what you need to know.
By Joey Solitro Published
-
TJX Stock: Wall Street Stays Bullish After Earnings
TJX stock is trading lower Wednesday despite the TJ Maxx owner's beat-and-raise quarter, but analysts aren't worried. Here's why.
By Joey Solitro Published
-
3 Key Ways You Can Help a Child or Grandchild Pay for College
college Options such as 529 plans, education savings accounts and tax-free gifts can ensure you don’t carry a child’s student loan debt into your golden years.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
You’ve Worked a Lifetime to Build Your Wealth. Here’s How to Keep It!
retirement Set yourself up for success by knowing what you want out of retirement, getting a grip on your spending needs and wants and then regularly checking whether you’re on track.
By Michael Torney, CFP®, JD, LLM (Taxation) Published
-
The Best Ways to Pay for College Involve Starting Young
college College 529 plans vs. Roth IRAs: A financial expert shares what she wishes she had known when saving for her own law school and her son’s college. Taking her advice could put you years ahead of the game.
By Alvina Lo Last updated
-
How to Motivate Kids to Save
personal finance It's not easy teaching your child to save. Here are some ways readers have incentivized their kids to keep track of their finances.
By Janet Bodnar Published
-
Five Best Financial Gifts for Grandkids
gift ideas If you've been giving your grandchildren cash for the holidays, now is a good time to rethink that. There are other financial gifts that will help teach them the value of money and set them up for life.
By David Rodeck Last updated
-
UTMA Accounts Explained: Rules, Custodial Brokerages and More
personal finance Giving your kids or grandkids a leg up in life is a nice thing to do, but if you’re thinking of doing it with an UTMA custodial brokerage account, you need to know a few of the pros and cons that come with them.
By Scott Tucker, Investment Adviser Representative Published
-
Fill Your Retirement Income Gaps – and Then Some
retirement planning When drawing up your retirement income plan, you need to be prepared to cover these three different income gaps. If you don’t, you’d better be ready to cut back on your lifestyle or your legacy plan.
By Jerry Golden, Investment Adviser Representative Published
-
School’s Out for Summer … But Tuition Is Back in the Fall
Paying for College Giving the gift of education never goes out of style. Here are some different options for helping out the young person in your life.
By Kathleen Kenealy, CFP®, CPWA® Published