Roth IRA Start Up Questions

[Guest VanessaB]

Hi ~

I am interested in starting some Roth IRA's for my children, ages 14 and 12. I have some very basic questions that I hope you don't find too simple. I am a product of a divorce where the husband handled all of the financial "stuff" and now here I am playing information catch up at age 38. Some of us are slower learners in life than others ;-)

What is the maximum amount that they can put in a Roth IRA?

Do they have to show proof of income? (they earned money via chores, yardwork, etc. on a cash basis)

Are there any other pieces of information that I should be aware of when starting a Roth IRA for them?

Will their Roth IRA be tied to my income, etc. in any way? If so, what are the limitations/guidelines?

Do they have until April 15th to start a Roth IRA for last year (2003)?

Thank you so much for any and all guidance that you may be able to provide.

Warm Regards,

Vanessa

[John G]

Some quick responses:

o No, they don't show or submit proof of earned income, but to qualify they must have earned income. Earned income does not include gifts, dividends, or interest. It may include newspaper route pay, lawn moving, babysitting, and paycheck type employment. If the IRS automated systems don't find an income match, you may get a letter requesting information of earned income.

o No, their income is not tied to yours. The only income outside of your own that is ever relevant, to my knowledge, is when you are dealing with spouses, which would not apply to children.

o In 2003, the maximum each child could contribute to an IRA $3,000 or their earned income, which ever is lower. Note, each childs calculation/qualification is done separately. You never are forced to contribute a max amount.

o You will need to find a custodian for the IRA funds that will handle a minor. Some custodians restrict IRA accounts to anyone 18 or older. This is not an IRS rule, just a custodian issue. I know Etrade did not used to allow minor children IRAs, while Charles Schwab and many other brokerages, banks and mutual funds did.

o You will need SSNs and perhaps a photo ID plus the usual basic data to get started. Each account will require a two page form.

o You have a choice. IRA or Roth IRA. I would highly recommend the Roth IRA because of the long term favorable tax treatment.

o The child does not have you fund the IRA/Roth with there money. A parent or relative can make the contribution. I would suggest that you explain what you are doing with your kids.... begining their basic investor education.... and avoiding the lack of info that you faced.

o Avoid the last minute rush, and get the process started before the peak of tax season.

Post again if you have additional questions.

[Lame Duck]

See IRS Publication 590 for an excellent and easy to understand decription of traditional and Roth IRAs. It is available online at www.irs.gov.

I agree with John G that a Roth IRA is probably going to be more beneficial to your children. Since their income is probably not taxable, the tax deductible traditional IRA would not benefit them nearly as much as the Roth, where qualified distributions are tax free.

You might also want to look into a 529 College Savings Plan, if your children plan on attending, since distributions may be tax free if used for qualified education expenses, at a much earlier age than with a Roth IRA. Anyone can contribute to a 529 plan on behalf of your children. See www.savingforcollege.com for information about College Savings Plans