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I've read the "Investing for Kids" series and am looking at the comparison matrix at the end. The one big question in mind is "Aren't options available for parents who want control of the money they are setting aside for their children that get tax advantages as well?". Why do these things have to be so restrictive?

As a parent, I am planning on using this account as an incentive to my children to do something constructive with their life (college, business startup, etc.). What options do I have in that three years from when she graduates from high-school to when she gains control of the monies at 21 if she has decided to screw off for the rest of her life?

Here is a scenerio that comes to mind...
I set up a Roth IRA for my child and contribute the $2000 a year. I set it up so that she gains control of it when she turns 21. At 18, she decides to do something with her life and go to college and some of the funds are used to pay for her first years. At age 19, she decides to drop out of college. Can I transfer that account to one in my name? Without taking a major tax hit?

Yuck!

Jimson_1
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jimsonn writes (in part):

I set up a Roth IRA for my child and contribute the $2000 a year. I set it up so that she gains control of it when she turns 21. At 18, she decides to do something with her life and go to college and some of the funds are used to pay for her first years. At age 19, she decides to drop out of college. Can I transfer that account to one in my name? Without taking a major tax hit?

I reply:

In addition to the practical difficulty of setting up an IRA for a minor (most custodians won't accept them because minors can't sign binding contracts), there's a legal problem. The maximum amount that may be contributed to a person's IRA is the smaller of $2000 or their earned income (an exception applies that allows taxpayers who are married filing jointly to make contributions on behalf of a non-working spounse). Thus, unless your child (or her spouse!) has earned income, no contributions to her Roth IRA are possible. If she does have earned income and you establish the account, the money is hers, and you can't take it back. --Bob
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<<The one big question in mind is "Aren't options available for parents who want control of the money they are setting aside for their children that get tax advantages as well?". Why do these things have to be so restrictive? >>

Have you looked at the 529 plans ?
See here for info :
http://www.savingforcollege.com/links.htm

They may fit your needs.

The Roth scenario - you can have a Roth that you use for her education. She can have a Roth if she has earned income with which to fund it. Roth money doesn't get "transferred" between individuals.

Jacki

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Jimson_1 asks:
I set up a Roth IRA for my child and contribute the $2000 a year. I set it up so that she gains control of it when she turns 21. At 18, she decides to do something with her life and go to college and some of the funds are used to pay for her first years. At age 19, she decides to drop out of college. Can I transfer that account to one in my name?

Besides the interesting notion that "doing something with her life" equals going to college...

The issue boils down to "whose money is it". If it is her money (which it is if you give it to her), then she is able to use it how she sees fit, especially once she reaches the age of majority, which differs by state. On the other hand, if it is your money, then you get to use it as YOU see fit, including giving it to your daughter or using it for her benefit.

Have you thought about investing the money yourself, in your own name, then making the decision at ages 18, 19, 20, and 21 whether or not go give your daughter any support? This means it is in your control, but the flip side of the coin is that it is not her money. If it becomes her money (that is, you give it to her), then the flip side of THAT coin is that she gets to do anything she wants with her own money. Including not doing something with her life.

I like the point of view I have seen on this board that an IRA is not the best vehicle for college savings. The reason is that you only get to deposit $2000 a year into an IRA (or, call it $4000 if you count both spouses' IRAs together). You get the maximum benefit by keeping the money in the IRA for as long as you can. If you intend to use the money 5, 10, or 15 years from now, you would be better off putting $2000 (or $4000) of your RETIREMENT money into the IRA, and putting the college money somewhere else, so that you don't "use up" the IRA with shorter term money.

Of course, as always, this will all depend on your own personal circumstances and you will have to make specific calculations tailored to you. But the general idea is quite sound.

Hope that helps a little.
JCKelly
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JCKelly,

Thanks for the advice.

Going to college is one of the ways she can do something with her life, that's why I called it a scenerio...there are many of them.

One question...by bypassing the IRA and putting money elsewhere, what tax-free "elsewhere options are there? Or, do you mean a taxable account?

Thanks!
Jimsonn



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Jimsonn,

Hmmm, well, to tell the truth yes I did mean a taxable account. In other words I was thinking of a scenario where, for example, you have $4000 a year to invest. Once you have hit your $2000 IRA limit (which you will be using for retirement only, remember), you have 2000 other dollars left over to put somewhere else. These other dollars would go, as far as I can have been able to figure out, into a normal taxable vehicle.

Here, of course, I am as interested in others' expertise as you are! Let's see what the other, more informed Fools, can give you.

JCKelly
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Jimsonn,

A section 529 college savings plan is specifically designed to give you the level of control you are seeking. Lots of people put investments in the kid's name (usually under the UTMA) to shift the investment income into a lower tax bracket but then have to worry about what the kid is going to do with it when they reach 18 or 21. In a 529 plan, you control the account for as long as you want and still get the income, tax-deferred, into the lower bracket. Others spend a lot of money on attorneys, accountants, and trust companies to establish education trusts as a way of maintaining some degree of control. But those are a pain and are irrevocable; a 529 plan is easy and is revocable.

If control of the money is an objective, it's hard to beat 529 plans.

Of course, a Roth IRA is a great thing too (and flexible enough for college education purposes)and in most cases should be where your first $2,000 go if you are eligible.

Joe
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You ask:

>> Why do these things have to be so restrictive?

Because otherwise, everyone would use them to avoid paying taxes completely. The IRS makes the rules restrictive so that they can favour certain things without having wide-open tax shelters.
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Thanks to all who responded to my questions. I have learned alot.

Jimsonn
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"Aren't options available for parents who want control of the money
they are setting aside for their children that get tax advantages as
well?"


There is something else to consider. The financial aid process assumes that 35% of assets in a child's name can be used to paying for college while only 6% of the parents assets are used in the calculation. Thus, if you use the child's name, you will have tax advantages that will help the assets grow, but will have it count against you later when applying for financial aid.
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"Aren't options available for parents who want control of the money
they are setting aside for their children that get tax advantages as
well?


There is something else to consider. I have a child who is a senior in high school, and I have learned that the financial aid process favors assets in the parent's name. The aid formula assumes that 35% of a child's assets can be used to pay for college while only 6% of the parents assets are used in the calculation. Thus, I gained a tax advantage for the first 17 years of my son's life because the investments were in his name, but I'll pay for it now with less financial aid.
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"Aren't options available for parents who want control of the money they
are setting aside for their children that get tax advantages as well?".


Another thing to consider is the financial aid process. The calculation assumes that 35% of a child's assets but only 6% if a parent's assets are available to pay for college each year. I made investments in my son's name and enjoyed tax advantages over the years, but now that he is a senior in high school, I've learned that he will be eligible for less financial aid as a result.
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"Aren't options available for parents who want control of the money
they are setting aside for their children that get tax advantages as
well?".


I don't have any easy answer for you, but I do have something else to consider. The financial aid process assumes that 35% of the assets in a child's name will be available to pay for college in a given year. Only 6% of the parent's assets are used in the calculation. Thus, putting assets in a child's name provides a tax advantage that helps the assets grow over the years, but results in reduced eligibility for financial aid down the road. I know. I am the parent of a high school senior!
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If control of the money is an objective, it's hard to beat 529 plans.

Of course, a Roth IRA is a great thing too (and flexible enough for college education purposes)and in most cases should be where your first $2,000 go if you are eligible.


Greetings,

(Saw your article in Kiplinger's, 529fan. Good press!)

I am utilizing a (soon to be multiple) 529 Plan solely for the control issue. Additional fringle benefits are (to me) the impact on financial aid and (hopefully) favorable tax treatment (please, Congress, make them tax free...)

I guess it boils down to goals, objectives and overall situation. My retirement is a higher priority than college for the kids. Sounds heartless, but I'd rather have them augment college (via scholarship or job) than the price of lambskin being their taking care of me.

As such, I'm fully involved with both my 401(k) and Roth IRA. I'm curious, though: why put college monies into a Roth first? Because of the retained control, known impact on financial aid (parent asset) and known tax treatment (free)?

MrBigglesworth
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