Roth IRAs for College Savings?

published 5 March 2008

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.

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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.

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.