MONEY-SMART KIDS


Kid IRA Q&A

Janet Bodnar

Find out if your child must file a tax return to open an IRA, what the best investments are for the account and whether an IRA affects college financial aid.



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.


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?

Advertisement

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).




You can get valuable updates like Money Smart Kids from Kiplinger sent directly to your e-mail. Simply enter your e-mail address and click "sign up."

More Sponsored Links


DISCUSS

Permission to post your comment is assumed when you submit it. The name you provide will be used to identify your post, and NOT your e-mail address. We reserve the right to excerpt or edit any posted comments for clarity, appropriateness, civility, and relevance to the topic.
View our full privacy policy


Advertisement

Market Update

Advertisement

Featured Videos From Kiplinger