Why you should start a Roth IRA for your child
(MoneyWatch) There's still time to contribute to a Roth IRA for 2012 -- you've got until April 15, but this year how about considering stashing money into a Roth for your child?
If you're saving for college for your children, you probably already know about 529 college plans, but you may not be aware that you can also save through a Roth.
If you're interested in a Roth, here are six things that you need to know about using these accounts for college:
1. A Roth can't hurt financial aid chances.
If you are concerned about qualifying for financial aid, this is truly one of the best reasons to own a Roth IRA. Money that is tucked away in a Roth IRA is not counted in financial aid formulas.
Let's say a teenager has $15,000 sitting in his Roth by the time his parents fill out the financial aid forms. The family would not have to mention the Roth assets because the FAFSA (Free Application for Federal Student Aid) does not ask about retirement accounts.
2. Roth IRA withdrawals do count in financial aid calculations.
The money in a Roth can't hurt financial aid eligibility until the cash is withdrawn. The withdrawals will be assessed at 20 percent, which is the percentage that student assets are assessed. The withdrawals won't hurt financial aid chances, however, if you wait until after you've submitted the final financial aid forms during the second semester of your child's junior year in college.
3. Your child must earn a paycheck.
A parent can establish a Roth for a child if the son or daughter is earning a salary. Because of this requirement, the Roth usually only is feasible when a child is a teenager.
4. There are contribution limits.
The maximum you can contribute each year to a child's Roth is $5,500. And that assumes that the child has made at least that much money. In other words, you can't contribute more than the child made in a year.
5. Education withdrawals are tax-free.
You can withdraw money from a Roth to pay for college without paying taxes on the withdrawals. You can enjoy this perk as long as you only withdraw your contributions and not the earnings that have accrued in the account.
6. You can choose your own investments.
You can set up a Roth at countless financial institutions. Your best bet will be to invest the money in low-cost index funds.