Best IRA for a college kid

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Q. I want to start a retirement account for my son, who will be a college freshman. He doesn’t have income. Is an IRA out of the question? And which is better, a Roth or a traditional IRA?
— Dad

A. We love that you want to help your son get started.

And while it is true that the earlier you start saving for retirement the better, you must meet the eligibility requirements in order to contribute, said Matthew Masterson, a certified financial planner with RegentAtlantic in Morristown.

In order to contribute to an Individual Retirement Account (IRA) or have a contribution made on their behalf, the child must have earned income in the calendar year, Masterson said. Earned income could mean funds from a summer job or funds they earn helping out in the family business.

“There is no minimum age to open an IRA account, however, if the child is under 18 or 21 — dependent on the state of residence — the parent may need to open a Guardian IRA until the child reaches that state’s age of majority,” Masterson said.

If your child does have earned income, he can make a contribution equal to the greater of their earned income or $5,500, he said. For instance, if your child makes $2,000 he could contribute a maximum of $2,000 to an IRA for that tax year.

“Often we find that contributing to an IRA on behalf of a child is a great use of that child’s parent’s $14,000 annual gift exclusion,” Masterson said. “The child may need their earned income for spending money but the parent can gift the child the amount to make an IRA contribution in that year.”

In terms of choosing which vehicle is best, Masterson said he believes a Roth IRA is generally the preferred retirement account.

“A Roth IRA provides tax-free growth and tax-free withdrawals in retirement,” Masterson said. “Especially in cases where the child likely has minimum income, the benefits of the tax-free growth and withdrawals later in life greatly outweigh the tax deduction the child would receive present day.”

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This post was first published in September 2016. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.