There are a couple of basic things here. For starters, you just want a good way to save for your kids' education. You heard about using a Roth IRA for your kids' educational savings, but you did not understand the requirements, even after it was explained. First, I doubt a Roth IRA is the BEST way for you to save for your kids' education, in nearly all cases. 529's have come a long way, and depending on which state you reside, you may receive a state income tax deduction or credit. You need to do the leg work and find out about your own state.

To FULLY understand how you can setup a Roth IRA for your children, you need to understand how a Roth IRA works, overall, before you even try to apply it to your kids' situations. First, there is an annual contribution limit of $4K, unless you are in the catch up years (and it will go to $5K in 2008). You seem to have that part down. However, you can only contribute up to the earned income amount. So, if you earned $3K in a year, you can only contribute $3K, even if you have other funds. Someone else can put in $3K for you, but that is all you can do.

There are some VERY specific rules about establishing a Roth IRA for your children. For starters, there is a precedent that has been established that a 7-year-old can have a Roth IRA. This does not mean that someone younger than 7 cannot have one, but it does mean that a 7-year-old, or older, can. For a child to earn income at an age younger than the child labor laws indicate, the child must be employed by their parent(s), basically. Now, there are also some VERY beneficial rules that allow you to hire your child and neither you or your child would have to pay FICA or unemployment taxes, and no income taxes up to the standard deduction, but I will leave that for you to find.

The bottom line is, the child must file taxes to established earned income. In addition, the child can contribute up to $4K or the amount of earned income, which ever is less; that money can come from anywhere, but cannot exceed those requirements. The "match" is just a concept that parents can use to provide an incentive to their children. Junior earns $2K, but doesn't want to deposit it all in the IRA. So, you tell Junior to deposit $1K, and then he can keep the other $1K. Then, you deposit $1K for him. He still had to earn $2K, but he only deposited $1K of his own money.

You should turn your baby into a model. That way you can have the kid earning income the day it is born!

sjm8566 said:Would someone kindly direct me to a bank or broker who will open a ROTH IRA for a 16 year old? My son, who is employed part-time, would like to open a Roth, but eveywhere we've tried requires him to be 18.
Try contacting Vanguard. I know that I was able to open a ROTH IRA account well before I was 18 there. The worst case scenario would likely be something along the lines of you having some sort of custodial position related to the account.

Dus10 said:debentureboy said:I think the Roth is way better than the 529, and agree a lot of people are pushing the 529 too much.

Well, there are benefits to each. Many state's are now offering state tax deductions or credits for 529 contributions... in those cases, 529's rule.

That being said, there is much more to the children's Roth IRA concept. If you hire your own child in your unincorporated business (I think LLCs with only the parents as members are eligible too), you do not have to pay unemployment insurance or the employer FICA match.

And you get to deduct the wages from your own tax return like with any other employee. It is taxable income for Jr, but he doesnt pay any tax unless his income exceeds the standard deduction. So hiring/paying your kids is definately worthwhile (provided it is real work).

Not to forget the power of compounding when funding an IRA at this young age. A $4,000 ROTH contribution per year for all four years of highschool (and no contributions after that) will yield Jr something in the neighborhood of $2mil at age 68. Tax free to boot.

simplicity said:I am a bit confused as to what my options are. I have gifted my sister about $1000, she just finished college. She tutors on the side, but she definitely don't make more than the minimum income required to file. From what I understand based on previous comments is that she needs to file that $1000 as income and pay taxes on that in order to be able to contribute to the ROTH? I don't understand how that works since the $1000 is already taxed from me. Or am I mistaken that she do not need to file?

If I need to withdraw her contribution, what kind of penalty (if any) are involved at this point? I realize I have up to april 16th to withdraw any excess contribution to avoid penalty on the excess.
Gifts are not taxable income. Your sister may not show your gift as income. And in any case, only "compensation" income qualifies for an IRA contribution. In other words, if she did not perform services for the $1000 or receive it as alimony, it doesn't count towards IRA eligibility even if she reports it on her tax return.

There is no minimum required to file a return. You may file a return even if your income is $0 if you like. After you earn a certain amount, you are required to file a return, but you are perfectly free to file a return even if you earn a lesser amount.

You say she does tutoring on the side. Does she do this as a W-2 employee of some company? If not, she is required to file if she makes at least $400 (four hundred). She doesn't make that much?

If she contributed this $1000 to an IRA, YOU may not withdraw it. Even if you put it into her IRA, YOU may not withdraw it. It is now her property. SHE must withdraw it. You can't do anything unless you are her court-appointed conservator or something like that (assuming she is an adult).

If it turns out that an excess contribution has been made to her IRA for 2006, she may withdraw it plus the earnings on the excess contribution until April 17th. If she files either a federal income tax return or an extension by April 17th, the deadline is extended to October 15th. She will have to pay ordinary income tax on the earnings plus a 10% penalty on the earnings. She will have to file a 2006 income tax and report the earnings plus penalty on her 2006 return even though she withdrew it in 2007. Make sure she notifies the IRA custodian that she is taking a return of her 2006 contribution and earnings so that they code the distribution properly. She will have to file a 2006 return to pay the 10% penalty even if she has no other income.

simplicity said:
Junior earns $2K, but doesn't want to deposit it all in the IRA. So, you tell Junior to deposit $1K, and then he can keep the other $1K. Then, you deposit $1K for him. He still had to earn $2K, but he only deposited $1K of his own money.

Based on the example above, does Junior have to file his income based on his $2k earnings? I was under the impression that anything under $3k you are not required to file.

I don't know of any requirement that you must file an income tax return in order to make a Roth IRA contribution. The MSN Money article suggested (properly) that if you hire your kid in your business you should issue a W-2 and do all of the other paperwork you would need to do for any other employee. If the kid earned less than the filing threshold, he would not be required to file a return even if he made a Roth IRA contribution. But he must have the required compensation income. Practically speaking, the kid probably should file a return as it may head off an inquiry from the IRS.

You are totally under the wrong impression about the filing requirements. The filing requirements are on pages 12 and 13 of the Form 1040 Instructions. Since Junior is probably a dependent, he has to file if he satisfies any of the tests in either Chart B or Chart C.

Thanks again. I will look into that form but will most likely consult with my tax advisor as well to see if there are any other options available.

I opened a Roth IRA when I was 14 with my credit union. My mother had opened me a minor savings account and then they allowed me to open the Roth IRA in my name only (with my mother only). At the time, IRA contributions were limited to $2k per year. I did that each year until I graduated high school. In college, I focused on the 401k and mortgage, not contributing to the Roth IRA anymore (I know, stupid move). But by my Junior year, I began making my contributions again. Today (literally, this morning), I closed out this Roth IRA to move it to a brokerage. I had CDs until this point in that Roth IRA and the CU started charging a $10 annual fee. I had built up a good $11k (when I started contributing in college, I went straight to stocks and mutual funds at another brokerage).

EDIT: typos