GETTING STARTED An IRA Owner's Manual Max Out Your 401(k) What to Ask Before Buying an Annuity How Much Will Social Security Pay You? MORE... Sponsored By: RETIREMENT TOOLS Am I saving enough for retirement? How much will Social Security provide after retirement? The power of boosting 401(k) contributions Recent Columns An Enterprising 7-Year-Old - Feb. 3, 2005 Investing Resources for Teens - Jan. 27, 2005 Establish Money Rules up Front - Jan. 20, 2005 Save Now to Avoid Financial Aid Crunch - Jan. 13, 2005 Roth IRA Rules for Kids - Jan. 6, 2005 Parents Can't Tap Child's Custodial Account - Dec. 30, 2004 MORE ... MONEY SMART KIDS E-MAIL   Sign Up   Now you can have Money Smart Kids delivered to your inbox every Thursday. Sign up now.

MONEY SMART KIDS
Roth Eligibility for Kids
by Janet Bodnar

Maybe it's because you've all made new year's resolutions to get your kids' finances in order, or maybe it's because tax season is upon us. Whatever the reason, my e-mail box has been more crowded than usual lately, so I'll tackle several queries this week.

Roth eligibility

My wife and I have a combined income above the maximum for a Roth IRA. Does this make our children ineligible, too?

Your income has no bearing on your children's ability to open a Roth IRA. However, to open a Roth of their own, your children must have earned income from a job. As long as each of them earns less than $95,000 a year as a single person, each can open a Roth and contribute up to $3,000 a year, or the amount of his or her annual earnings, whichever is less.

If an older sibling is paid by her own parents for babysitting younger siblings, would that count as earned income for a Roth IRA, assuming the money is declared as income on her tax return?

Yes, it would. It would be more of an arm's-length arrangement if your daughter were babysitting for a family other than your own. But as long as she's doing legitimate work for you, the money she makes counts as earned income for purposes of opening a Roth.

She won't get a W-2 form. So whether she works for you or someone else, have her keep detailed records of when she babysits, for whom, and how much she makes -- just in case the IRS raises any questions.

Custodial accounts

Our daughters have money in what I think is called a UTMA savings account. It's earning a very low rate of interest, and we would like to set up investment accounts for the girls and buy stocks with the money. How do we go about setting up an account in each girl's name?

Just fill out the paperwork at any brokerage firm or mutual fund company. Tell the company you want to set up custodial accounts, with you or your spouse as custodian. That's necessary because the girls are younger than 18. The accounts will belong to them, but as custodian you will be able to use their savings to invest on their behalf.

By the way, UTMA (or UGMA) stands for Uniform Transfers to Minors Act (or Uniform Gifts to Minors Act), the laws under which custodial accounts are established.