My son is 15 years old and has $1500 earned income to invest. To start a self-directed Roth IRA for himself I have three concerns. Will the monies invested count against him for any financial aide at college time? After 5 years I understand that the money can be used for the purchase of a new home penalty free. Are there any tax ramifications? Can monies from a Roth be used for education after 5 years without penalties?

Thanks for your help.

"My son is 15 years old and has $1500 earned income to invest. To start a self-directed Roth IRA ..."

Sorry to not answer your question, but I am interested in the income part of your situation.

What are some examples of ways kids could get legit ("close to legit?") income - besides working at a burger stand at 16/17? In another post someone mentioned the kid would need a W2 (maybe 1099?). My kids are young - but wouldn't it be great to start a Roth for them... They don't have the temperament to be child models.

Any creative folks out there figured this one out?

Thanks, Bob.

Greetings, BillW321, and welcome.

<<My son is 15 years old and has $1500 earned income to invest. To start a self-directed Roth IRA for himself I have three concerns. Will the monies invested count against him for any financial aide at college time? After 5 years I understand that the money can be used for the purchase of a new home penalty free. Are there any tax ramifications? Can monies from a Roth be used for education after 5 years without penalties?>>

The jury's still out on how the Roth IRA will count against the student's college financial aid when that IRA is owned by the child. Typically, retirement assets are excluded in determining eligibility, but the Roth is a new ball game and financial aid offices have a wide latitude. You'll have to wait longer on this one to see which way the ball will bounce.

As to using the money for education or a new home purchase, keep in mind that all that's avoided when the withdrawal is for those purposes is the 10% penalty for early withdrawal. Ordinary income taxes must still be paid. Also, remember the home purchase withdrawal has a lifetime limit of $10K.

Regards…..Pixy

Greetings, Dabob, and welcome.

<<What are some examples of ways kids could get legit ("close to legit?") income - besides working at a burger stand at 16/17? In another post someone mentioned the kid would need a W2 (maybe 1099?). My kids are young - but wouldn't it be great to start a Roth for them... They don't have the temperament to be child models.

Any creative folks out there figured this one out?>>

There are exceptions, but it requires the parents to do all sorts or weird records keeping and filings of SS and estimated taxes, etc. The surest way is a regular job. That way the IRS knows for a fact the money was "earned" through employment. I'm sure the tax board can give you some ideas of what it takes in the absence of a W-2 or 1099.

Regards…..Pixy

Pixy Wrote:
<<As to using the money for education or a new home purchase, keep in mind that all that's avoided when the withdrawal is for those purposes is the 10% penalty for early withdrawal. Ordinary income taxes must still be paid. Also, remember the home purchase withdrawal has a lifetime limit of $10K.>>

It's my understanding that for a contributory ROTH you
can withdraw contributions tax free and penalty free
at any time and for any reason.

This flexibility makes a ROTH more attractive for a 15
year old. If the money is needed for tuition in 3-7 years
or for a house in 10-15 years the contributions can be
used tax free, the earnings are still a nice jump start
to retirement. (After 3-7 years the contributions will still
be most of the value of the ROTH)

In a similar way a ROTH might be a suitable home for
my disaster fund. (The emergency fund deals with any
one emergency, if two or more emergencies occur at the
same time I may need the disaster fund.)
This assumes I don't have enough money to dedicate
the $2000 ROTH for investment and still have enough
left over for the disaster fund.

Vtaeger,

<<It's my understanding that for a contributory ROTH you
can withdraw contributions tax free and penalty free
at any time and for any reason.

This flexibility makes a ROTH more attractive for a 15
year old. If the money is needed for tuition in 3-7 years
or for a house in 10-15 years the contributions can be
used tax free, the earnings are still a nice jump start
to retirement. (After 3-7 years the contributions will still
be most of the value of the ROTH)>>

As to contributions, you're absolutely correct. And therein lies your fatal error. Contributions will not be counted as a distribution for the first home or education use exceptions. Those kinds of withdrawals will come from earnings exclusively when taken from a Roth. Thus, those two early withdrawals have zip to do with contribution withdrawals in this context.

Regards....Pixy

>>>. If the money is needed for tuition in 3-7 years
or for a house in 10-15 years the contributions can be
used tax free, the earnings are still a nice jump start
to retirement.<<<

And don't forget the 5-year waiting period before you can withdraw without penalty...

orangeblood

Orangeblood,

<< And don't forget the 5-year waiting period before you can withdraw without penalty...>>

And don't forget that only applies to conversion Roth IRA contributions. Contributory Roth IRA contributions may be taken at any time. Earnings may be taken after age 59 ½ penalty free provided the account has been open at least five years.

Regards….Pixy

>>><< And don't forget the 5-year waiting period before you can withdraw without penalty...>>

And don't forget that only applies to conversion Roth IRA contributions. Contributory Roth IRA contributions may be taken at any time. Earnings may be taken after age 59 ½ penalty free provided the account has been open at least five years.<<<<

Hmm... I missed that somewhere along the way. In fact, I still had a question as to whether initial funds in a conversion Roth would be considered as contributions.

To put it in the form of a simple question: If I convert a traditional IRA to a Roth this year, and the intitial total is $5,000.... in 5 years will I be able to withdraw that $5,000 without penalty? The reason I'm asking is I still haven't seen a definitive "conversion money will be treated as a contribution" statement from the Feds.

Second question: Just to clarify... you're saying if I open a Roth IRA this year with a $2,000 contribution, next year I can withdraw $2,000 without penalty?

Thanks,

orangeblood

Orangeblood,

<<Hmm... I missed that somewhere along the way. In fact, I still had a question as to whether initial funds in a conversion Roth would be considered as contributions.

To put it in the form of a simple question: If I convert a traditional IRA to a Roth this year, and the intitial total is $5,000.... in 5 years will I be able to withdraw that $5,000 without penalty? The reason I'm asking is I still haven't seen a definitive "conversion money will be treated as a contribution" statement from the Feds.>>

Yes, as the technical correction in Congress will clarify when it's finally passed and signed into law. All indications are the provisios as I've outlined in previous messages will be enacted intact.

<<Second question: Just to clarify... you're saying if I open a Roth IRA this year with a $2,000 contribution, next year I can withdraw $2,000 without penalty?>>

Yes, as the present law already specifies.

Regards……Pixy

Pixy,

>>><<Second question: Just to clarify... you're saying if I open a Roth IRA this year with a $2,000 contribution, next year I can withdraw $2,000 without penalty?>>

>Yes, as the present law already specifies.<<<<<<<<

In today's Tax Strategy column by Roy Lewis at http://www.fool.com/School/Taxes/1998/taxes980205.htm there seems to be a contradiction:

"Example 1: Jim, age 35, makes a qualified rollover contribution from his regular IRA to a Roth IRA in the amount of $60,000 on December 30, 1998. Jim is required to spread this income over a four-year period, and is required to report $15,000 per year in 1998, 1999, 2000, and 2001. In January 2003, Jim takes a principal distribution of $40,000. Jim will not be assessed any tax or penalty on this distribution. Why? Because the five-tax year exception has been met.

Example 2: Same facts as above, but assume that Jim takes this $40,000 distribution in 2002. Jim will pay no income tax on this distribution. But, since the five-tax year period was not met, and assuming that none of the penalty exceptions are met, Jim WILL pay a 20% early withdrawal penalty of $8,000 on this distribution. This 20% represents the normal early withdrawal penalty of 10% PLUS the additional 10% early withdrawal penalty assessed against 1998 rollovers."

Roy keeps talking about that five-year period, even when speaking of contributions. Therefore, I'm still not getting it.<g>

orangeblood

Orangeblood,

<<In today's Tax Strategy column by Roy Lewis at http://www.fool.com/School/Taxes/1998/taxes980205.htm there seems to be a contradiction:

"Example 1: Jim, age 35, makes a qualified rollover contribution from his regular IRA to a Roth IRA in the amount of $60,000 on December 30, 1998. Jim is required to spread this income over a four-year period, and is required to report $15,000 per year in 1998, 1999, 2000, and 2001. In January 2003, Jim takes a principal distribution of $40,000. Jim will not be assessed any tax or penalty on this distribution. Why? Because the five-tax year exception has been met.

Example 2: Same facts as above, but assume that Jim takes this $40,000 distribution in 2002. Jim will pay no income tax on this distribution. But, since the five-tax year period was not met, and assuming that none of the penalty exceptions are met, Jim WILL pay a 20% early withdrawal penalty of $8,000 on this distribution. This 20% represents the normal early withdrawal penalty of 10% PLUS the additional 10% early withdrawal penalty assessed against 1998 rollovers."

Roy keeps talking about that five-year period, even when speaking of contributions. Therefore, I'm still not getting it.<g> >>

Read Example 1 again. Note that you're missing the fact Roy is talking about a CONVERSION Roth IRA. The rollover of the traditional IRA to this account is technically a "contribution." The rollover "contribution" under the technical corrections now pending in Congress may NOT be touched for five years or a penalty will result. Additionally, the CONVERSION Roth IRA must be a separate account from any CONTRIBUTORY Roth IRA based on guidance received from the IRS. A CONTRIBUTORY Roth IRA is one to which you may contribute up to $2K per year. In the CONTRIBUTORY IRA, you may take the contributions - but not the earnings - at any time without penalty.

Regards……..Pixy