Friday, June 17, 2011

Graduation Gift Idea: A Roth IRA

An advisor passed this suggestion on to me. His client said her son had come home from high school one day (he was a senior) saying that his teacher had told the class that they should all take $500 of their graduation money and open up a Roth IRA.

This is a great idea, IF the student has earned income. You must have earned income to make any IRA contribution, either traditional or Roth. The safe harbor is W-2 income.

You don’t even have to use the student’s own money. They can earn $3,000 for the summer, for example, spend it, and you can put $3,000 in their Roth IRA for them.

If the student is still a minor, you may have to shop to find an IRA custodian that will open an account for the student, but there are custodians that will do this. There may be a need to have a guardian named on the account until the student reaches the age of majority.

IRS Publication 590 has information on what is considered income, including self-employment income (in case your student mows lawns or baby sits). You can find this publication at On the left hand side of the screen, click on Forms and Publications. The publication is free.

By IRA Technical Consultant Beverly DeVeny and Jared Trexler
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*Copyright 2011 Ed Slott and Company, LLC