Can a parent open a Roth IRA for a child who has not made $2,000 incom

[Guest jan]

In a recent magazine article, which I can no longer locate, it talked about a parent opening a Roth IRA for a child at the age of 16 who had not made the $2,000 and based on certain guidelines of investment would end up with a pretty good sum upon his retiremetn. Our financial planner thinks I'm crazy and does not know of anything like this. Please send me in the right direction. I'm really not that nuts.

[Guest LMH]

Your not nuts, it's the people writing the articles that are off their rockers. In all fairness most off the articles I have read on this topic are not incorrect, they are simply leaving out information that can make a big difference.

A parent can make a contribution on behalf of a child, but the child must have earned income. Now that can mean paying them for cutting the lawn or babysitting, but it must be documented and must be what the IRS considers reasonable for that task. Your accountant should be able to help you with the required documentation. Hope this helps.

[John G]

Clarification: $2000 is the maximum IRA contribution, not a threshold for income. You can set up an IRA for a child for a small amount, as long as it does not exceed their earned income. For example, kid age 3 makes $300 in modeling allows the parents to open a Roth for $300. Great idea.

For most families, the practical implication is that as your teenager begins to work part time or summers you can establish an IRA. You can use your funds to create the IRA, you are not forced to use their paycheck. For higher income families, this can build an inheritance via Roth option. Downside issues: you kid can be incontrol of big $$ when they become 21 and these assets will have a greater impact on scholarship chances than if they were in the parents name. Kids enhance the tax shelter aspect of the Roth in that they have a very long period of time for the investments blossom.

[This message has been edited by John G (edited 03-29-99).]